Level 6 · Financial Ratios
Debt-to-Equity
How much of the business belongs to lenders versus owners.
In this lesson
What you'll be able to do
- Calculate debt-to-equity
- Interpret it by sector
- Understand why financials differ
- Combine it with coverage ratios
Think about it
Why is a debt-to-equity of 5 alarming for a factory and completely normal for a bank?
Story
Let's picture it
A family buys a ₹1 crore house with ₹80 lakh of loan and ₹20 lakh of savings. Their debt-to-equity is 4. If house prices fall 20%, their entire savings are wiped out while the loan remains in full. Leverage does not change what you own, it changes how quickly you can lose it.
Visual
Reading leverage by sector
IT services
Often near zero debt, the business needs little capital
FMCG
Typically low leverage with strong cash generation
Infrastructure and utilities
Higher leverage is structural and expected
Banks and NBFCs
Very high ratios are normal, borrowing is their raw material
Plain English
The simple explanation
Debt-to-equity is total debt divided by shareholders' equity. It shows how the business is funded and how much cushion exists if things go wrong.
There is no universal safe number. Interpret it against the sector norm and against the company's own history and cash generation.
Never read leverage alone. Pair it with interest coverage, operating profit divided by interest, which shows whether the company can comfortably service what it owes.
Real world
Indian infrastructure
Several large Indian infrastructure groups expanded during a boom using heavy borrowings. When project cash flows arrived later and smaller than expected, high debt-to-equity turned from a growth tool into a survival problem, a pattern that repeats across cycles.
Watch out
Common mistakes
- Applying one 'safe' number across all sectors.
- Ignoring interest coverage.
- Overlooking when the debt actually matures.
Did you know?
Net debt subtracts cash from total debt, a company with large borrowings and even larger cash reserves can be net-debt-free.
Your turn
Mini challenge
Find one company's debt-to-equity and interest coverage. Would it survive a 30% fall in operating profit?
Quick quiz
1 / 5
Wrap up
Summary
Debt-to-equity shows how much of the business is funded by lenders. Judge it against sector norms and always pair it with interest coverage and the maturity profile.
- D/E = debt ÷ equity
- Interpret by sector, not by a universal rule
- Always check interest coverage
- Net debt accounts for cash held
Revise