Metric Explainer: Debt/Equity Ratio
D/E ratio measures how much debt a company uses relative to its own equity (shareholders' funds). It's the simplest measure of financial leverage. "D/E batat...
Simple definition
D/E ratio measures how much debt a company uses relative to its own equity (shareholders' funds). It's the simplest measure of financial leverage.
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"D/E batata hai ki company ke apne paiso ke muqable mein kitna udhar liya hai."
Formula
D/E = (Total Debt) / (Total Shareholders' Equity)
Where Total Debt = Long-term borrowings + Short-term borrowings + Current portion of long-term debt.
Good range
| D/E Ratio | Risk Level | Interpretation |
|---|---|---|
| 0–0.3 | Conservative | Almost debt-free |
| 0.3–0.7 | Moderate | Comfortable leverage |
| 0.7–1.0 | Above average | Watch interest coverage |
| 1.0–2.0 | High | Only acceptable for capital-intensive industries |
| > 2.0 | Very high | Dangerous for most sectors |
Sector context
| Sector | Acceptable D/E | Why |
|---|---|---|
| IT / FMCG | < 0.3 | Asset-light, generate enough cash internally |
| Manufacturing | 0.5–1.0 | Capex needs, moderate leverage acceptable |
| Infra / Real Estate | 1.0–2.0 | Heavy project funding needs |
| Utilities (Power) | 1.0–3.0 | Long-term assets, regulated returns |
| Banks / NBFCs | 7–15x | Leverage IS the business (don't use D/E, use CAR/Leverage Ratio) |
Don't compare across sectors
D/E of 0.5 for an IT company is aggressive. D/E of 0.5 for a power utility is conservative. Always compare within sector.
Companion metric: Interest Coverage Ratio
D/E alone doesn't tell you if debt is manageable. Pair with:
Interest Coverage = EBIT / (Interest Expense)
| Coverage | Safety |
|---|---|
| > 5x | Very comfortable |
| 3–5x | Adequate |
| 1.5–3x | Tight — one bad quarter could stress payments |
| < 1.5x | Danger — potential default risk |
Red flags
- D/E rising every year without revenue/profit growth to match
- Interest coverage below 2x for non-infrastructure companies
- Short-term debt > 50% of total debt (refinancing risk)
- Debt used for acquisitions that don't improve ROCE