The debt-to-equity ratio tells investors how much a company relies on debt versus its own money. A high D/E ratio means the company may be risky, especially during tough times. A low D/E ratio shows the company is using more of its own capital, which is safer. This ratio helps investors decide if the stock is worth investing in based on financial stability.

How is Debt-to-Equity Ratio Calculated?

The debt-to-equity ratio is calculated by dividing a company’s total liabilities by its shareholder equity. For example, if a company has ₹100 crore in debt and ₹50 crore in equity, the D/E ratio is 2. This means the company is using twice as much debt as its own money. This simple formula gives a clear picture of financial risk.

What is a Good Debt-to-Equity Ratio?

A good D/E ratio depends on the industry. For capital-heavy industries like power or infrastructure, higher ratios are normal. But for IT or FMCG companies, lower D/E is better. Generally, a D/E ratio below 1 is considered safe. It means the company is using less debt and has more stability, which is good for long-term investors.

Why Do Investors Care About the D/E Ratio?

Investors care about the D/E ratio because it shows if the company is financially strong. If the ratio is too high, the company might struggle to repay loans during slowdowns. This can affect profits and even stock prices. A balanced D/E ratio shows the company is handling both equity and debt well, which attracts smart investors.

What Does a High D/E Ratio Mean for a Stock?

A high D/E ratio means the company has borrowed a lot. This can increase risk, especially if interest rates rise or the company’s income falls. Stocks of such companies may be more volatile. Investors should be careful with these stocks unless the company has strong cash flows to manage the debt.

Should You Only Rely on D/E Ratio for Investment?

No, the D/E ratio is just one tool. Investors should also look at profit margins, cash flow, sales growth, and the overall market trend. A full view of the company’s performance gives better results. But yes, the D/E ratio is a strong signal when judging a company’s debt risk and overall strength.