Debt to equity ratio
D/E
The debt to equity ratio compares borrowed money with shareholders' money. It shows how much of the business is financed by lenders who must be paid whether or not there is profit.
Formula
D/E
D/E = Total Debt ÷ Total Equity
Benchmark: The investor's ideal is zero; never apply it to banks or NBFCs
Reading the number
Commerce textbooks teach that the ideal D/E is 2:1, borrowing twice your equity, because leverage boosts shareholder returns. The investor's view is different: the ideal D/E is zero.
The reason is asymmetry. Equity holders are paid only if there is profit, and they accept that. Interest must be paid whether there is profit or loss. When an industry slowdown brings two or three years of losses and there is no money left for interest, the company sinks. Many good businesses have been destroyed this way.
Indian example
Related ratios
Glossary terms
From the research
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