Debt is neither good nor bad. It is a multiplier.
In good years, it makes a company's returns look brilliant. In bad years, it can turn a small slowdown into a crisis. The same borrowing does both.
The debt-to-equity ratio tells you how hard that multiplier is working. It is one of the simplest ratios to calculate and one of the most important to understand.
At Belong, we often meet investors who check a company's profits but never its borrowing. NRIs buying Indian stocks do this. Resident Indians picking global companies do it too.
This guide shows how to read debt-to-equity, and why the same logic applies to your own finances.
What Is the Debt-to-Equity Ratio?
The debt-to-equity ratio, or D/E, compares how much a company has borrowed with how much its shareholders own.
Kotak Mutual Fund calls it one of the most commonly used measures of financial leverage. DSP Mutual Fund describes it as showing how a company's assets are financed, by equity versus debt.
In simple terms, it answers one question. For every rupee the owners have put in, how many rupees has the company borrowed?
The Debt-to-Equity Formula
Debt-to-Equity Ratio = Total Debt / Shareholders' Equity
Here is a hypothetical example. A company has total debt of 600 crore rupees and shareholders' equity of 400 crore rupees.
D/E is 600 divided by 400. That is 1.5.
For every rupee shareholders own, the company owes 1.5 rupees to lenders. Kotak Mutual Fund uses this same illustration.
What Counts as Debt?
This is where calculations often differ. DSP Mutual Fund lists interest-bearing liabilities such as loans, debentures, bank overdrafts, finance lease obligations and redeemable preference shares.
Some analysts use total liabilities instead. That includes items like supplier payments, which carry no interest. DSP Mutual Fund shows this broader version too.
The two methods can give very different answers for the same company. When comparing D/E across sources, check which definition is being used.
Variations You May See
Long-term D/E: Uses only long-term borrowings. Useful for judging structural leverage.
Net D/E: Subtracts cash from debt first. A company holding large cash balances may have far lower net leverage.
Debt to capital: Divides debt by debt plus equity. DSP Mutual Fund lists this variant as well.
Suppose our company holds 200 crore rupees in cash. Net debt is 400 crore. Net D/E is 400 divided by 400, which is 1.0.
Reading the Ratio
Here is a broad, qualitative guide.
DSP Mutual Fund explains that a ratio of 1 means investors and creditors have an equal stake in the assets.
Kotak Mutual Fund adds an important caution. There is no fixed threshold for high or low. A higher or lower ratio is not automatically good or bad.
How Debt Multiplies Returns
This is the part most explanations skip. Debt does not just add risk. It changes how returns behave.
Take a hypothetical business with 1,000 crore rupees of assets. It earns 120 crore of operating profit, a 12 percent return on assets. Ignore tax for simplicity.
Scenario 1: No debt.
The company is funded entirely by 1,000 crore of equity. Return on equity is 12 percent.
Scenario 2: Funded with debt.
The company has 400 crore of equity. It also has 600 crore of debt at 9 percent interest. Interest costs 54 crore. Profit is 66 crore. Return on equity is 16.5 percent.
Debt lifted shareholder returns from 12 to 16.5 percent. That is the attraction of leverage.
Now Watch the Downside
Suppose a weak year halves operating profit to 60 crore. That is a 6 percent return on assets.
Without debt, return on equity falls to 6 percent.
With debt, interest still costs 54 crore. Profit falls to just 6 crore. Return on equity collapses to 1.5 percent.
The same slowdown cut the debt-free company's returns in half. It cut the leveraged company's returns by about 90 percent.
Lenders get paid first, in good years and bad. Shareholders absorb whatever is left.
Tip: When a company's profits look unusually strong, check its D/E. Some of that strength may be borrowed.
Interest Coverage: Can the Company Afford Its Debt?
D/E tells you how much a company has borrowed. It does not tell you whether it can comfortably pay the interest.
That is the job of the interest coverage ratio.
Interest Coverage = Operating Profit / Interest Expense
Operating profit here usually means EBIT, earnings before interest and tax. Kotak Mutual Fund notes coverage ratios are frequently analysed alongside leverage ratios.
In our example, operating profit of 120 crore covers interest of 54 crore about 2.2 times. In the weak year, coverage falls to about 1.1 times. The company is barely earning enough to pay its lenders.
If interest rates rise, the pressure grows. Suppose the same debt reprices to 11 percent. Interest becomes 66 crore. Coverage in a normal year drops to about 1.8 times.
Kotak Mutual Fund makes the same point. Higher debt can leave a company more exposed when interest rates rise or business conditions weaken.
Debt-to-EBITDA: A Cash Flow View
Another way to judge debt is against earnings rather than equity. Debt-to-EBITDA compares borrowings with operating earnings before depreciation.
Kotak Mutual Fund describes it as helping assess the relationship between borrowings and operating earnings. In its example, 600 crore of debt against 200 crore of EBITDA gives 3.0.
That figure roughly tells you how many years of operating earnings would be needed to repay debt. Lenders and credit analysts watch it closely.
Why "Good" D/E Depends on the Sector
Kotak Mutual Fund notes that capital-intensive sectors such as infrastructure, utilities, telecommunications and real estate often carry higher leverage. A ratio that looks high in one industry may be normal in another.
Here is a broad, qualitative comparison.
The last row matters. Banks take deposits and lend them out. Their D/E is naturally very high, so standard D/E rules do not apply. Bank strength is judged with capital adequacy and asset quality instead.
Always compare a company's D/E with peers in the same industry, as Kotak Mutual Fund recommends.
The Edge Case Most Investors Miss
A very low D/E is not always a strength. A highly profitable company with no debt may be leaving value on the table.
If a business earns well above its borrowing cost, sensible debt can raise shareholder returns. Some companies keep zero debt out of caution, not because it is optimal.
The reverse edge case also exists. A company can have a moderate D/E but face a large repayment due soon. Debt maturity matters as much as debt size.
There is a third. A company with accumulated losses may have very small equity. Even modest debt then produces a huge D/E ratio. If equity turns negative, the ratio cannot be interpreted normally at all.
Signs That Debt Is Becoming a Problem
Watch for these warning signs when reviewing a company.
D/E rising year after year without matching growth in profits.
Interest coverage falling towards one.
Debt growing faster than revenue over several years.
Frequent refinancing of loans that are coming due.
Borrowing to pay dividends rather than funding them from cash flow.
Promoter shares pledged as collateral for loans, which can lead to forced selling in a fall.
Strong solvency, meaning the ability to meet long-term obligations, is what investors are really trying to judge.
A Pattern We See: Growth Funded by Borrowing
Here is a common advisory pattern. An investor spots a company with fast-growing profits and a rising share price. They buy.
What they missed was the balance sheet. The growth came from borrowed money. D/E had climbed sharply over three years.
Then interest rates rose, or demand slowed. Profits shrank faster than expected. The share price fell much further than the business decline seemed to justify.
The investor saw the profit line. They did not see the debt that was magnifying it.
Our guide on EPS and why it matters explains how to read earnings quality. Checking D/E alongside EPS growth is one of the simplest habits that protects investors.
D/E, Valuation and Company Size
Leverage also affects how markets value a company. Two businesses with identical profits may trade at different valuations if one carries much more debt.
Smaller companies often find borrowing more expensive and harder to refinance. High leverage in a small company can be riskier than the same ratio in a large one. Our guide to market capitalisation explains how company size shapes risk.
Debt also affects dividends. Companies under debt pressure often cut payouts first. Our guide on dividend yield explains how to judge whether a dividend is sustainable.
Debt From the Lender's Side
Every company's debt is someone else's investment. When you buy a corporate bond or a debt fund, you become the lender.
For bond investors, the issuer's D/E and interest coverage are central. Lower leverage generally means a stronger capacity to repay.
Our guides to corporate bond funds and bonds vs debt mutual funds explain the lender's perspective. Our comparison of corporate FDs vs bank FDs shows why issuer strength matters for deposits too. For dollar-denominated debt, see our guide to GIFT City bonds.
The NRI Scenario: Leverage in Two Layers
If you're working in Dubai and holding Indian shares, debt affects you in two places. The company's balance sheet and your own.
On the company side, highly leveraged Indian companies can be sensitive to interest rate cycles. Their share prices can fall sharply when rates rise. For NRIs, that combines with currency risk.
On your own side, many NRIs carry loans in two countries. A car loan in the UAE and a home loan in India is a common combination. Each adds to your personal leverage.
Our guide to banks for NRI home loans and our main NRI home loans guide explain Indian borrowing options. Our guide to car loans in the UAE covers the UAE side.
If your income stopped, could you still service both? Our guide on preparing financially for job loss abroad helps you stress-test this.
A steadier, dollar-denominated savings layer can help. Belong offers USD fixed deposits through GIFT City, which you can compare on our NRI FD rates tool. Our comparison of GIFT City FD vs FCNR vs NRO and NRE FDs explains each option. Download the Belong app to compare them in one place.
Capital gains on Indian shares are taxable in India for NRIs. The Income Tax Department's non-resident help page explains filing obligations. Our tax filing service can help.
The Resident Indian Scenario: Leverage Across Markets
If your portfolio sits entirely in India, its leverage is tied to Indian rates and business cycles.
Global companies borrow in different currencies and rate environments. Some large global companies carry very little net debt. Others borrow heavily to fund buybacks.
Accounting rules also differ. Compare D/E within the same market and sector, not across countries.
Resident Indians can invest abroad under the RBI's Liberalised Remittance Scheme. The RBI's LRS FAQs explain what is permitted. GIFT City offers a simpler path to USD exposure. Browse options on our GIFT City mutual funds tool, or read our guide to investing in the USA from India.
Your Personal Debt-to-Equity Ratio
The same ratio applies to your household. Your equity is your net worth, meaning assets minus debts. Your debt is everything you owe.
High personal leverage works exactly like corporate leverage. When income is strong, it feels manageable. When income drops, it can become dangerous quickly.
Credit card debt is the most expensive form of personal leverage. It compounds against you rapidly. Our guide on how compound interest works shows why. Our guide to the best credit cards in India helps you choose a card you can pay in full.
Your borrowing history also shapes your borrowing cost. A strong CIBIL score usually means better rates. If you are returning to India, our guide on rebuilding your credit score helps.
D/E, IPOs, Stocks and Trading
IPO documents disclose a company's borrowings. Many companies use IPO proceeds to repay debt. That can lower D/E sharply after listing.
Check whether the post-IPO balance sheet looks healthier, and whether that improvement will last. Read about GIFT City IPOs or explore IPO investing on our platform.
For established companies, our best stocks list is a research starting point, not a recommendation.
Trading with borrowed money is leverage applied to your own portfolio. Before exploring futures and options, read our guide to GIFT Nifty futures.
Interest rate changes often move highly leveraged stocks and the wider market. Our GIFT Nifty historical data and chart guide help you see longer patterns. The GIFT Nifty live tracker and our weekly GIFT Nifty outlook show current direction.
SEBI's Beginner's Guide to the Capital Markets is a helpful primer on reading company information.
Why Debt Feels Safe Until It Does Not
Debt rarely feels dangerous when it is taken on. Conditions are usually good. Profits are rising. Borrowing seems sensible.
The risk appears later, when conditions change. Debt does not adjust to bad news. Interest and repayments arrive on schedule, regardless.
That is true for companies and households alike. The best time to reduce leverage is while things are still going well.
Return to India: Reassessing Debt
If you plan to move back, your income currency may change, and possibly your income level. Loans taken against a foreign salary may need a fresh look.
Your tax position may also change as your residential status shifts. Review both your investment holdings and your personal borrowing with a professional before the move.
Your Decision Guide
If a company's D/E is high, check interest coverage and debt maturity next.
If D/E is rising for years without profit growth, treat it as a warning.
If you compare D/E, stay within the same sector and market.
If you analyse banks, use capital and asset quality measures instead.
If a company has zero debt and high returns, ask whether it is too cautious.
If your own debts feel heavy, reduce expensive borrowing before investing more.
What happens if you ignore this?
You may buy companies whose profits are mostly borrowed, just before rates rise. Or you may carry personal debt that turns a temporary income gap into a lasting setback.
What NRIs and Resident Indians Should Do Next
If you're an NRI: Check D/E and interest coverage on your Indian stock holdings. Then add up your own loans across countries and ask whether they would survive an income break.
If you're a resident Indian: Review leverage across your holdings, especially in rate-sensitive sectors. Compare global companies only against their own market peers.
Compare Fund Options
If you prefer funds over direct analysis, our tools help you compare.
Browse the GIFT City mutual funds tool and the GIFT City AIF tool. Global options include the DSP Global Equity Fund and the Edelweiss Greater China Equity Fund.
India-focused options include the Tata India Dynamic Equity Fund and the Sundaram India Mid Cap Fund. You can also explore our USD mutual fund options. Our regulatory credentials are on our licences page.
Frequently Asked Questions
What is a good debt-to-equity ratio?
There is no universal good ratio. It depends on the industry, cash flow stability and interest coverage. Compare a company with its own sector peers.
Is a high debt-to-equity ratio bad?
Not always. Capital-intensive businesses often carry higher debt by design. The real question is whether profits comfortably cover interest and repayments.
What is the difference between debt-to-equity and interest coverage?
Debt-to-equity shows how much a company has borrowed relative to equity. Interest coverage shows whether its operating profit can comfortably pay the interest.
Why do banks have high debt-to-equity ratios?
Banks borrow through deposits and lend that money out. High leverage is part of their business model, so other measures are used to judge them.
Can debt-to-equity be negative?
Yes, if shareholders' equity is negative because of accumulated losses. In that case, the ratio cannot be interpreted normally and signals financial stress.
Sources
Disclaimer
This article is for educational purposes only and is not investment, tax or legal advice. All company figures in examples are hypothetical and used for illustration. Investments are subject to market and currency risk. Please consult a qualified advisor before making investment decisions.