What is Debt to Equity ratio?

Debt to equity ratio is a type of solvency ratio that suggests the reliability of the company’s long term financial policies. Debt to equity ratio suggests proportion of debt (provided by creditors) and equity (provided by equity shareholders) used to finance company’s assets. It also indicates company’s capability to repay its creditors on time. It is a measure of leverage taken by the company. It is calculated by dividing total debt (secured +unsecured borrowings) to shareholder’s funds.

How to interpret Debt to equity ratio

A ratio of 1 indicates that the company’s capital structure is equally contributed by debt and equity. A high debt to equity ratio means the company is having an excessive debt and has a higher interest burden to service its debt thereby dragging its profits. A debt-free company scores higher over company having debt. A higher debt to equity ratio is not good for the company but one needs to compare it with industry peers since this ratio varies from industry to industry.  Certain capital intensive sectors like Shipping, Steel, Power etc may have a higher debt equity ratio than others.

Formula Debt to equity ratio = Total debt / Total equityIt is calculated by dividing total debt (secured + unsecured borrowings) to shareholder’s funds

Example Assume total debt of company is Rs. 200 crore and total equity is 100 croreDebt to equity ratio = 200/100 = 2This means that a company has Rs 2 in debt for every equity held.