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What Is a Good Debt-to-Equity Ratio and Why It Matters

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March 29, 2023


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The debt-to-equity ratio a.k.a. D/E ratio is one of the key financial metrics used by investors and analysts to evaluate the financial health of a company. If a company has a high D/E ratio, this means that it is high on debt as compared to equity. If you are wondering, “what is a good debt-to-equity ratio?” and “why does it matter?”, we have all the answers for you.

How is the D/E Ratio Calculated?

The formula used to calculate the D/E ratio is:

D/E ratio = Total debt of the company / total shareholder's equity

If company ABC has a total outstanding debt of ₹10 Lakhs while its total shareholder’s equity is ₹40 Lakhs, then the D/E ratio is 1/4 = 0.25. Is this debt-to-equity ratio good?

What if the situation was reversed and the debt was ₹40 Lakhs while the equity was only ₹10 Lakhs. Then the D/E ratio would be 4. So, what is the ideal debt-equity ratio?

What is a Good Debt-to-equity Ratio?

The first thing to note is that there is no fixed number that denotes how much debt-to-equity ratio is good for a company’s stock. There are several factors involved such as the industry or segment it operates in, the products or services it offers, global market trends, socio-economic and geo-political situation, etc. Having said that, most experts believe a D/E ratio between 1.5 to 2.5 shows the company is financially stable.

Taking the above examples, a D/E ratio of 0.25 is very good as it shows that the company is mostly funded by equity assets and has low obligations to repay. The second example though, where the D/E ratio is 4 shows the company is mostly financed by lenders, and may be a risky investment.

Why Do Investors Use the Debt-to-equity Ratio?

Investors and analysts use the D/E ratio to assess a company's risk profile and financial stability. Generally, a higher D/E ratio suggests higher financial risk. However, a higher D/E ratio can, at times, also indicate that a company is taking advantage of cheap debt financing to grow its operations, which can lead to higher profits. It is prudent to use the D/E ratio in the context of the industry and competition. Benchmarking is a valuable exercise that can help you gauge the company’s financial position in a more complete manner.

Drawbacks of the D/E Ratio

While the D/E ratio can serve as a measure of the financial leverage of a company and indicator of its solvency, it should not be used as the sole criterion for making your investment decision. This is because the debt-to-equity ratio varies across industries. For example, the transport sector is known to have a naturally higher debt-to-equity ratio than most other industries since there is a lot of initial loan that is borrowed to buy the fleet of vehicles.

Moreover, a D/E ratio does not convey the underlying circumstances of the company. For instance, a company may have a high D/E ratio indicating it has more debts currently. But, this does not necessarily mean the company is performing poorly. It is possible that the company has invested upfront in a major project or is heading towards a growth phase and needs to borrow the money to support it.


A smart investor is an informed investor. You can use the debt-to-equity ratio to assess a company’s financial performance, but it is important to understand the context, the other financial metrics of the company (like earnings, assets, liabilities, etc.), and use the industry-wide benchmark to compare with, and identify if the debt-to-equity ratio is good or not. Having done your research, you can go ahead and invest in Indian or even US stocks for more global exposure.

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Frequently Asked Questions

1. Is a debt-to-equity ratio below 1 good?

Yes, a D/E ratio below 1 shows that the company has more equity-backed financing and lesser debts in comparison. However, do not use the D/E ratio as a standalone metric to evaluate the company’s performance.

2. Is a debt ratio of 50% good?

Yes, a D/E ratio of 50% or 0.5 is very good. This means it is a low-debt business and the company’s equity is twice as high as its debts.

3. What is an acceptable debt-to-equity ratio?

The D/E ratio can vary as per the industry and various other factors that influence the company’s performance. However, it is generally agreed that a debt-to-equity ratio between 1.5 to 2.5 indicates a financially stable company with a low risk profile.


Investment and securities are subject to market risks. Please read all the related documents carefully before investing. The contents of this article are for informational purposes only, and not to be taken as a recommendation to buy or sell securities, mutual funds, or any other financial products.
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