Introduction:
If you’re serious about learning solid investing stuff (and not just doing timepass in the stock market ), you should really understand financial ratios.
One such super important number is the Debt-to-Equity (D/E) ratio.
If you are starting your journey with good share market classes in pune, chances are you’ve already heard the trainer stressing on “balance sheet strength”. Well, buddy, D/E ratio is where it starts!
What is the Debt-to-Equity (D/E) Ratio?
In very simple words, the D/E ratio tells you how much loan (debt) a company has compared to its own money (equity).
High D/E = Company running more on borrowed money
Low D/E = Company mostly using its own funds
Why is the D/E Ratio Important for Investors?
- Financial Stability: Low-debt companies survive bad times better.
- Earnings Quality: Too much debt can eat profits through high interest payments.
- Bankruptcy Risk: High D/E companies are at higher risk in recessions.
- Investor Confidence: Investors feel safer when leverage is low.
In simple terms — Low D/E = Peaceful sleep for investors
How to Calculate the Debt-to-Equity Ratio?
The formula is easy:
D/E Ratio = Total Debt ÷ Shareholder’s Equity
For example,
Total Debt = ₹500 crore
Shareholder’s Equity = ₹1000 crore
D/E Ratio = 0.5 (pretty good)
You can easily find these numbers in the company’s balance sheet on the NSE or the BSE.
Good vs Bad D/E Ratio — How Much Debt is Too Much?
General Rule of Thumb:
- Below 1 is considered safe.
- Between 1-2 is manageable depending on the sector.
- Above 2 is risky.
But remember… sector matters too. Banks, NBFCs naturally have higher D/E ratios.
Indian Companies with Low D/E Ratios (Examples)
(As of recent data)
| Company | D/E Ratio |
| Infosys Ltd | 0.07 |
| TCS | 0.05 |
| HUL (Hindustan Unilever) | 0.10 |
| Asian Paints | 0.15 |
Such companies manage to grow steadily without taking crazy loans.
Common Mistakes While Using D/E Ratio
- Ignoring Sector Differences: Banks can have 5x D/E and still be fine. IT companies shouldn’t.
- Not Checking Trends: A sudden rise in D/E year-on-year? Big red flag!
- Looking at Standalone Figures: Always check consolidated D/E if the company has subsidiaries.
How Debt Affects Stock Prices
- High debt = bigger risk of bankruptcy if sales slow down.
- During high-interest periods (like post-2022), loan repayments become costlier.
- Investors prefer low-debt stocks in uncertain times.
Example:
In the COVID-2020 crash, high-debt companies like airline stocks crashed much worse than IT or FMCG low-debt stocks.
Debt-to-Equity Ratio: Sector-Wise Benchmarks in India
| Sector | Acceptable D/E Range |
| Banking & Finance | 5.0 – 10.0 |
| IT Services | 0.0 – 0.5 |
| FMCG | 0.0 – 0.5 |
| Real Estate | 1.0 – 2.5 |
| Pharma | 0.2 – 0.8 |
Don’t judge companies with the same D/E across all sectors blindly.
Practical Tips for Using D/E Ratio in Stock Selection
- Always combine D/E with the Interest Coverage Ratio.
- Prefer companies with consistent or reducing D/E over the years.
- In bull markets, people ignore debt, but in bad times, it hits hard.
- Use D/E with other metrics like ROE, EPS growth.
Conclusion
Debt is not always bad… but too much debt definitely is!
Before investing your hard-earned money, always check how much debt your target company is carrying. If you really want to learn these insider tricks properly, advanced training from a reputed stock market training institute in thane can really sharpen your skills.
At the end of the day, it’s your money… handle with care.
FAQs
Q1: Is high D/E always a bad sign?
Not always. It depends on the industry. But generally, lower debt is safer for investors.
Q2: Where can I find the D/E ratio of companies?
You can check company annual reports, NSE India website, BSE India, or stock research portals like Screener.in.
Q3: What is a good D/E ratio for Indian companies?
Below 1 is considered healthy for most non-financial companies.
Q4: Can companies reduce their debt?
Yes, by repaying loans using profits or equity fund-raising (but check if they dilute shareholder value).