Ch.10 · Benchmarks and Performance Evaluation · medium
What is 'debt-to-equity ratio' (D/E) and why do fund managers consider it?
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EXPLANATION
D/E ratio = Total Debt / Shareholders' Equity. A high D/E ratio means the company is heavily leveraged — its interest obligations are large relative to equity. This amplifies returns in good times but can cause financial distress in downturns. Quality-focused fund managers prefer companies with low D/E ratios (strong balance sheets), especially in economic downturns.
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