Definition
Debt-to-Equity Ratio
The debt-to-equity ratio compares a company's total borrowings to its shareholders' equity, gauging how leveraged (and risky) its balance sheet is.
D/E = Total Debt / Shareholders' Equity. A ratio of 1 means equal debt and equity. Low D/E suggests a financially conservative firm; high D/E means heavy reliance on borrowing, which boosts returns in good times but is dangerous in downturns or when interest rates rise.
Acceptable D/E varies by sector, capital-intensive industries (power, infrastructure) naturally carry more debt, while IT and FMCG run near zero. Rising D/E plus falling profits is a classic warning sign of financial stress.
Related terms
- Promoter PledgingPromoter pledging is when promoters use their shares as collateral to raise loans, a practice that can signal financial stress.
- Current RatioThe current ratio measures a company's ability to pay short-term obligations using its short-term assets.
- Return on Equity (ROE)ROE measures how much net profit a company earns for each rupee of shareholders' equity, showing how efficiently it puts owners' money to work.
Plain-English explainer from The Dispatch Investors Encyclopedia. General information, not financial advice.