The debt ratio shows how much debt a company has compared to its total assets. In stock investing, this ratio helps you understand if the company is borrowing too much money. A high debt ratio means more risk, while a low debt ratio shows the company is financially stable. This is important to know before you invest.

What is Debt Ratio in Simple Terms?

Debt ratio tells you how much of a company’s assets are financed by debt. It is calculated by dividing total debt by total assets. For example, if a company has ₹50 lakh in debt and ₹100 lakh in assets, the debt ratio is 0.5. That means 50% of its assets are funded through loans or borrowings.

Why is Debt Ratio Important for Investors?

Debt ratio helps investors know if a company is taking too much risk. If the company has a high debt ratio, it may face problems in paying back loans, especially during bad times. A lower debt ratio means the company is more stable and safer to invest in. It helps you decide if the company is strong enough to handle its financial responsibilities.

What is a Good Debt Ratio for a Company?

A good debt ratio is usually below 0.5. This means less than half of the company's assets are from borrowed money. It shows the company is not heavily dependent on loans. But this can vary depending on the industry. For example, banks and capital-heavy companies may have a higher ratio. Still, for most companies, a lower ratio is better and safer.

How Can High Debt Affect a Company’s Stock?

If a company has too much debt, it might struggle to repay it during slow business periods. This can reduce profits, and investors may lose confidence. The company might also need to take more loans or issue more shares, which can lower share prices. High debt also means higher interest payments, which reduces earnings and can affect dividends too.

How to Find a Company’s Debt Ratio?

You can find the debt ratio in the company’s balance sheet. Look at the total debt and total assets. Use the formula: Debt Ratio = Total Debt / Total Assets. You can also check financial websites like Moneycontrol, Screener, or company annual reports where this number is already given. Always compare it with other companies in the same sector.

Can a Company Have Zero Debt? Is That Good?

Yes, some companies have zero debt. It means they don’t borrow money and use their own funds to run the business. This shows they are financially strong. But zero debt is not always necessary. Sometimes, taking small debt for growth is also good if the company can manage it well. So, balance is the key. Too much or no debt at all must be seen with other financial numbers too.