Debt-to-equity ratio

Key takeaways

Leverage indicator

Measures the extent to which a company is funding its growth with debt versus equity.

Higher ratio = higher risk

Indicates heavier reliance on debt, which can lead to increased financial obligations.

Lower ratio = more conservative:

Reflects cautious capital structure with lower debt exposure.

Important to investors and creditors

Helps assess financial health, risk appetite, and repayment ability.

Industry-sensitive

Optimal ratio varies across sectors depending on capital intensity.

The D/E ratio is a cornerstone of financial analysis. Lenders look at it to evaluate a company's creditworthiness, while investors use it to understand the risk-reward balance. A high ratio might signal aggressive growth funded by borrowing — which could lead to higher returns, but also higher financial stress in downturns. A low ratio may suggest stability but also missed growth opportunities.

How it’s calculated

Debt-to-Equity Ratio= Total Liabilities/shareholders' Equity

Both values are pulled from the company’s balance sheet.

Interpreting the ratio

A D/E ratio > 1 means the company has more debt than equity — potentially risky but common in capital-heavy industries.
A D/E ratio < 1 indicates the company is primarily financed through equity — typically seen as less risky.
Comparing D/E ratios only makes sense within the same industry, as capital structures vary widely.

Real-world examples

Case study:

Tata Motors’ evolving debt-to-equity strategy

In the early 2010s, Tata Motors took on significant debt to fund the acquisition of Jaguar Land Rover. This pushed its D/E ratio above 2.5, raising investor concerns. Over the next decade, the company focused on deleveraging through improved cash flow and asset sales. By FY24, Tata Motors had brought its D/E ratio closer to 1.5 — signaling improved balance sheet health.

This evolution showcases how strategic debt management can balance growth and financial discipline.

Frequently asked questions about debt-to-equity ratio

1) Is a higher D/E ratio always bad?

Not necessarily. It depends on the industry and context. For example, utility companies often have high D/E ratios due to stable cash flows.

2) What causes the D/E ratio to change?

Increases in debt or reductions in equity (e.g., losses, dividends, buybacks) raise the ratio. New equity issuance or debt repayment lowers it.

3) How do investors use the D/E ratio?

They assess whether the company is over-leveraged, has room to borrow, or may face financial stress in a downturn.