Lesson 01 — Debt-to-Equity Ratio
Week 08 · Lesson 1 of 3 · Week 08 — Key Ratios Part 2: Leverage & Efficiency
DebttoEquity = Total Debt / Shareholders' Equity It tells you: for every ₹1 of equity, how much debt does the company use? "Company ne apne paison ke compari...
What is D/E?
Debt-to-Equity = Total Debt / Shareholders' Equity
It tells you: for every ₹1 of equity, how much debt does the company use?
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"Company ne apne paison ke comparison mein kitna udhar liya."
Benchmarks
| D/E Ratio | Signal |
|---|---|
| 0 – 0.5 | Low leverage — conservative |
| 0.5 – 1.0 | Moderate — typical for most companies |
| 1.0 – 2.0 | High — need to check interest coverage |
| > 2.0 | Very high — risky unless banking/NBFC |
Banks are different
Banks and NBFCs have D/E of 5-10× — that's their business model (lending borrowed money). Don't compare bank D/E with manufacturing D/E.
Zero-debt companies
Some companies operate with zero debt — they fund everything from internal cash flows. Examples: TCS, Infosys, Bajaj Auto, HUL.
Zero debt = financial strength + flexibility. But not always optimal (some debt can enhance returns).
What to watch
- D/E rising over time = company taking on more debt. Why? Growth investment (ok) or covering losses (bad)?
- Short-term debt > long-term debt = refinancing risk
- Compare D/E within the same sector
Key takeaway
Lower D/E = lower financial risk. But zero debt isn't always best — moderate debt can enhance returns if ROCE > cost of debt.