Companies can be funded by owners' money (equity) or by borrowing (debt). The debt-to-equity ratio compares how much the company owes with how much the owners have put in.
Debt-to-equity = Total debt ÷ Shareholders' equity
Example: ABC Manufacturing has total debt of ₹400 crore and shareholders' equity of ₹500 crore, giving a debt-to-equity ratio of 0.8. It owes 80 paise for every ₹1 of owners' money.
A lower ratio means less reliance on borrowing; a higher ratio means more. But whether a given level is comfortable depends on the business, its industry and how stable its cash flows are.
- 1Find total debtUsually short-term plus long-term borrowings.
- 2Find shareholders' equityTotal assets minus total liabilities.
- 3Divide debt by equityThe result is often written as a decimal or a multiple.
Debt-to-Equity Ratio
How much borrowed money the company uses for every rupee of owners' money.
Debt / Equity = Total Debt ÷ Shareholders' Equity
Debt / Equity
0.5x
Debt is not automatically bad — it can fund growth more cheaply than issuing shares. What matters is whether the business earns more on that capital than the interest it pays, and whether its cash flows can comfortably service the debt. Capital-intensive industries tend to carry more debt than asset-light ones.
Debt is not inherently bad. Borrowing can fund growth that owners' money alone could not. The question is whether the company can comfortably service the interest and repay the principal.