Total debt divided by shareholders' equity — a measure of financial leverage that determines how much of the business is financed by borrowing.
Deeper Explanation
High financial leverage amplifies both gains and losses. A business with a D/E ratio of 3x is far more fragile in a downturn than one with 0.5x, because debt must be serviced regardless of business performance. Graham preferred conservative balance sheets for his value investments — he did not want financial leverage to turn a business problem into a solvency crisis. Buffett takes this further: he wants businesses that could survive virtually any economic environment. D/E must be read in context: capital-intensive businesses (utilities, banks) naturally carry more debt, while asset-light businesses should carry very little.
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