Debt-to-Equity Ratio

The Debt-to-Equity (D/E) Ratio is a financial leverage ratio that compares a company's total liabilities to its shareholders' equity. It indicates the proportion of equity and debt used to finance a company's assets.

Debt-to-Equity Formula

D/E Ratio = Total Debt / Shareholders' Equity

Or using Total Liabilities:

D/E Ratio = Total Liabilities / Shareholders' Equity

Example

If a company has:

• Total Debt: ₹300 lakhs (Long-term ₹200L + Short-term ₹100L)
• Shareholders' Equity: ₹200 lakhs

D/E Ratio = ₹300 / ₹200 = 1.5:1 or 1.5

Interpretation

• Ratio < 1: More equity than debt (conservative)
• Ratio = 1: Equal debt and equity
• Ratio 1-2: Moderate leverage (common)
• Ratio > 2: High leverage (higher risk)

Industry Variations

• Capital intensive: Manufacturing, utilities (higher D/E acceptable)
• Asset light: Technology, services (lower D/E preferred)
• Banks: Very high D/E is normal (deposits are liabilities)