6.6What is the Debt-to-Equity ratio?
Debt-to-Equity (D/E) compares how much the company has borrowed with how much the owners have put in.
Debt must be repaid with interest whether business is good or bad. Too much debt can sink a company in a downturn.
A family with ₹10 lakh of savings and a ₹30 lakh home loan has D/E = 3. A job loss would hurt them much more than a family with no loan.
More financial risk; interest eats profits; danger in downturns.
Conservative finances; more resilience.
Lower is generally safer (below 1 for most non-financial companies). Banks naturally have high leverage; judge them differently.
- Debt = ₹4,000 cr; equity = ₹8,000 cr.
- D/E = 4,000 ÷ 8,000 = 0.5.
- Varies a lot by industry (power, infra are debt-heavy by nature).
- Doesn’t show when debt is due.
Always compare a ratio with (1) the company’s own history and (2) other companies in the same industry. A single number on its own means little.
- D/E = debt ÷ equity.
- Below 1 is comfortable for most businesses.
- Don’t apply to banks.
Q1. Debt ₹600 cr, equity ₹300 cr. D/E?Show answer
2.
Q2. Why is high debt risky?Show answer
Interest and repayments are due even when profits fall.
Q3. Is D/E 0 always best?Show answer
Not always; some debt can boost returns if used wisely.