How much of the business is borrowed
Two people buy identical $400,000 houses. One pays cash. The other borrows $360,000 and puts in $40,000. Both own a house, but a 20% fall in house prices is an inconvenience for the first and a catastrophe for the second. Debt to equity measures that same difference for a company.
The calculation divides total borrowings by shareholder equity. A ratio of 0.5 means the company has borrowed fifty cents for every dollar its owners hold. A ratio of 2.0 means it has borrowed two dollars for every dollar of owner capital, and its results will swing much harder in both directions.
Running the numbers on Nike
Nike recently carried roughly $12.5 billion of total borrowings, including lease obligations, against shareholder equity of about $14.4 billion. Divide 12.5 by 14.4 and the ratio is approximately 0.87.
Read that as: for every dollar the owners hold in the business, Nike has borrowed about eighty-seven cents. For a large consumer brand with steady cash coming in, that is a manageable position rather than an alarming one. The same ratio at a company with unpredictable sales would deserve much more caution.
Rounded recent figures, shown to make the arithmetic followable.
Why the same number means different things
Utilities and property companies routinely operate above 1.5 because their revenue is predictable enough to support borrowing comfortably. Banks look extreme by this measure because borrowing is their raw material rather than a risk they took on. Software companies frequently sit below 0.3 because they need little physical investment.
Screening the entire market for a ratio below 0.5 will therefore hand you a list dominated by one or two industries and quietly exclude perfectly sound companies elsewhere. Set the bar within the industry you are looking at.
The distortion nobody warns beginners about
Equity sits on the bottom of this division, and buybacks shrink equity. A company that spends years buying back its own shares will watch its debt to equity ratio climb even if it never borrows another dollar, because the denominator keeps getting smaller.
In extreme cases companies with long buyback programmes report negative equity, which makes the ratio meaningless rather than terrifying. When a ratio looks shocking, check whether borrowings really grew before concluding anything. If debt is flat and equity has been shrinking, you are looking at accounting rather than risk.
Using it as a safety rule in Stax
This measure earns its keep as a filter that removes fragile companies rather than as a way to rank good ones. Pairing a debt limit with a profitability rule is particularly effective, because it strips out the companies whose impressive return on equity is really a borrowing story.
Build the plan with that pairing, then test it. Stax replays it across five or more years of real prices, and those years include stretches where borrowing cost real trouble, which is exactly the period you want to see before committing anything.