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Debt to Equity Ratio: Formula, Calculation & What's Good | Fi.Money
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LAST EDITED BY SABA MALAIKA ON APRIL 9, 2025.
LAST EDITED BY SABA MALAIKA ON APRIL 9, 2025.
GUIDES LAST EDITED BY SABA MALAIKA ON APRIL 9, 2025.
The debt-to-equity ratio (DE ratio) is a financial ratio used to evaluate the proportion of a company’s liabilities relative to its shareholders’ equity. If you plan to invest in the stock market over the long term, it’s important to know how to calculate the debt-to-equity ratio from a company's balance sheet.
Investors use the debt-to-equity ratio to evaluate a company's fundamentals. Calculating it is fairly simple because you only need two key metrics: the company’s total liabilities and equity.
Debt refers to a company's total liabilities, including loans, bonds, and other forms of borrowing. These obligations must be repaid with interest over time.
Equity represents the shareholders' stake in the company, essentially what would remain if all assets were liquidated and all debts paid off. It includes share capital, retained earnings, and other reserves.
For Indian companies, debt often comes in term loans from banks, non-convertible debentures, working capital loans, and sometimes external commercial borrowings. At the same time, equity typically comprises promoter holdings, institutional investments, and public shareholdings.
For investors in the Indian market, the debt-to-equity ratio serves as a crucial financial health indicator. Here's why it matters:
For Indian companies, maintaining an appropriate debt-to-equity ratio is particularly important given the historically higher interest rates than developed markets, making excessive debt potentially more burdensome.
An important part of calculating a company's debt-to-equity ratio involves understanding how to decode it. The ratio tells you how much debt a company has relative to its equity. In other words, it shows you how the proportion of debt and equity is used to finance the purchase of a company’s assets.
The lower the debt-to-equity ratio, the better. It implies less dependence on debt financing. Experts typically peg the ideal DE ratio at 2:1, although choosing stocks of companies with a DE ratio of 1.5 to 2 is advisable. Anything higher could be a risk because it indicates significantly high debt levels in the company.
The debt-to-equity ratio formula is straightforward:
Debt-to-Equity Ratio = Total Liabilities ÷ Total Shareholder Equity
In some variations, only interest-bearing debt (rather than all liabilities) is used in the calculation, but the standard approach includes all obligations.
Total Liabilities include:
Total Shareholder Equity includes:
In the Indian context, companies listed on the BSE and NSE report these figures in their quarterly and annual financial statements by Indian Accounting Standards (Ind AS).
If you’re wondering how to calculate a company's debt-to-equity ratio, here are the 4 easy steps you need to follow.
A company's shareholders’ equity can be found on its balance sheet. This includes the share capital, reserves, and surplus. For instance, let’s assume the share capital of a company is ₹50 lakhs, and its reserves and surplus are ₹40 lakhs. So, the total shareholders’ equity will be ₹90 lakhs.
The total debt includes a company's long-term and short-term borrowings. For instance, if a company's long-term borrowings amount to ₹40 lakhs and its short-term borrowings amount to Rs. 60 lakhs, its total debt would be ₹1 crore.
The next important step in calculating the debt-to-equity ratio involves using the right formula. The DE ratio is computed as follows:
DE Ratio = Total Liabilities ÷ Shareholder’s Equity
This formula requires you to substitute the numbers obtained in the previous two steps.
Using the formula, we get a DE ratio of 1.11 (i.e., Rs. 1 crore ÷ Rs. 90 lakhs). This essentially means the company's debt is 1.11 times its equity.
Understanding what the debt-to-equity ratio represents is crucial for making informed investment decisions in the Indian market.
A high debt-to-equity ratio (generally above 2.0 for most Indian industries) suggests:
Due to their capital-intensive businesses, many infrastructure and utility companies in India, such as Power Grid Corporation or NTPC, typically have higher D/E ratios.
A low debt-to-equity ratio (below 0.5 for most industries) suggests:
Companies like Infosys and TCS in the Indian IT sector typically maintain very low D/E ratios, often below 0.1, reflecting their asset-light business models and conservative financial management.
A negative debt-to-equity ratio occurs when a company has negative shareholder equity, typically resulting from accumulated losses exceeding all invested capital. In the Indian context, this is often seen in companies under severe financial distress or those that have experienced prolonged periods of loss.
This situation requires careful analysis, as it usually indicates significant financial troubles unless specific circumstances like recent restructuring or strategic long-term investments with deferred returns exist.
There's no universal "ideal" debt-to-equity ratio applicable across all Indian companies. What's appropriate varies based on:
Industry benchmarks provide crucial context for evaluating a company's D/E ratio:
While context-dependent, some general guidelines for Indian companies include:
Below 1.0: Generally considered conservative and financially stable across most industries (excluding financial services).
1.0 to 1.5: Typically acceptable for established companies in stable industries.
1.5 to 2.0: This may be reasonable for capital-intensive businesses but warrants closer examination.
Above 2.0: Usually considered high-risk for non-financial companies and requires strong justification.
Indian investors should compare a company's D/E ratio against these general guidelines, direct industry peers, and the company's historical trends.
Let's calculate the debt-to-equity ratio for a hypothetical Indian manufacturing company, "Bharat Manufacturing Ltd":
From their latest balance sheet (figures in crores):
Step 1: Calculate Total Liabilities Total Liabilities = Current Liabilities + Non-Current Liabilities Total Liabilities = ₹250 Cr + ₹450 Cr = ₹700 Cr
Step 2: Apply the debt-to-equity ratio formula Debt-to-Equity Ratio = Total Liabilities ÷ Total Shareholder Equity Debt-to-Equity Ratio = ₹700 Cr ÷ ₹500 Cr = 1.4
This means Bharat Manufacturing has ₹1.4 debt for every ₹1 equity. For the Indian manufacturing sector, this would be considered moderate leverage, not excessively risky, but showing significant use of debt financing.
For comparison:
While valuable, the debt-to-equity ratio has several limitations that Indian investors should be aware of:
While this guide focuses on Indian companies, comparing U.S. benchmarks can provide helpful context. To find debt-to-equity ratios for U.S. stocks:
For Indian investors, local platforms like Moneycontrol, Screener.in, and Trendlyne provide easier access to debt-to-equity ratios and other financial metrics for both Indian and international companies.
The debt-to-equity ratio is just one of several leverage metrics. Understanding how it compares to other ratios provides a more comprehensive picture:
Formula: Total Debt ÷ Total Assets
This ratio shows what percentage of a company's assets are financed by debt. While D/E compares debt to equity, debt-to-asset relates debt to the company's total resources.
Formula: EBIT ÷ Interest Expense
This measures how easily a company can pay interest on outstanding debt. It's particularly relevant in the Indian context, where interest rates have historically been higher than in developed markets.
Formula: Total Debt ÷ EBITDA
This indicates how many years of current operational earnings would be required to pay off all debt. Indian banks widely use it for lending decisions.
Formula: Net Operating Income ÷ Total Debt Service
Popular among Indian lenders, this ratio measures the cash flow available to meet annual interest and principal payments on debt.
For a comprehensive financial analysis of Indian companies, investors should consider the debt-to-equity ratio alongside these complementary metrics to gain a holistic understanding of a company's leverage position and financial health.
Now that you know how to calculate the debt-to-equity ratio, you can use this financial metric to identify strong companies for your portfolio. This ratio can be crucial for evaluating stocks from domestic and international markets. So, if you want to invest in US stocks, please check the DE ratio before buying.
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The debt-equity ratio is a financial metric that tells a company's debt levels as a percentage of its equity. It indicates the proportion of debt and equity used to finance the purchase of the company’s assets.
The formula for how calculating the debt-to-equity ratio is as follows. You need to divide the company's total liabilities by its shareholders’ equity. For example, if the total liabilities of a company are Rs. 20 lakhs, and if its shareholders’ equity is Rs. 15 lakhs, the debt-to-equity ratio will be 1.33 (i.e. Rs. 20 lakhs ÷ Rs. 15 lakhs).
To calculate the debt-equity ratio, you must first identify a company’s total debt and shareholders' equity. The next step in how to find the debt-to-equity ratio involves dividing the total liabilities by the total equity. The resulting number is the DE ratio.
This varies widely depending on the type of business. Heavy industries like manufacturing typically have higher ratios (sometimes above 2.0) because they need more equipment and facilities. Tech companies usually have lower ratios. Generally speaking, below 1.0 is considered safer, while 1.0-1.5 is often fine for many businesses. The best approach is to compare a company with similar businesses in the same industry.
Neither is automatically better! Lower ratios mean less financial risk since the company has fewer loan payments. Higher ratios mean the company uses more borrowed money, which can boost profits when business is good but can be dangerous if sales drop. The right level depends on the company's business model, industry standards, and economic conditions.
The debt-to-equity ratio shows how a company balances borrowed money against owner investments. It gives insight into the company's financial stability and risk level. Investors use it to understand whether a company might struggle to pay its debts in the future.
You'll find everything you need in the company's balance sheet, which is part of their quarterly and yearly financial reports. If you don't want to calculate it yourself, many financial websites and stock research platforms automatically show this ratio for most companies.
While both help measure financial risk, they compare different things. The debt-to-equity ratio compares borrowed money to shareholder investments, showing how the company balances these two funding sources. The debt-to-asset ratio compares debt to everything the company owns, showing what percentage of a company's resources were purchased with borrowed money.
