Why might an investor be concerned about a high debt-to-equity ratio?

A high debt-to-equity ratio indicates that a company is financing a larger portion of its operations through debt compared to equity. This can raise concerns for investors primarily because it suggests a greater risk of financial instability. When a company is highly leveraged, it may face difficulties in meeting its financial obligations, especially during economic downturns or periods of reduced revenue. High levels of debt can lead to increased interest payments, which may impact cash flow and limit the company's flexibility to invest in growth opportunities or handle unexpected challenges.

Furthermore, companies with high debt relative to equity are more sensitive to changes in interest rates and economic conditions, which could amplify their risk profile. In contrast, a lower debt-to-equity ratio typically signals a more balanced capital structure, where there is less reliance on borrowed funds, suggesting greater financial stability and lower risk for investors. Hence, the concern surrounding a high debt-to-equity ratio primarily revolves around the potential for increased financial risk and instability.