"Discover what the Debt-to-Equity Ratio is, why it’s important for businesses, and how to calculate it easily."
Published: 26 April 2025
Updated: 29 April 2025
Understanding a company's financial situation is the key to better growth. The debt to equity ratio comes across as an important factor to monitor financial aspects closely. If you've been looking for a simple explanation of DTE, here we have it for you.
Consider it like this: a company has two primary methods to fund its operations – either by taking loans (that's the "debt" aspect) or by utilizing the funds from its owners' investments (that's the "equity" aspect). The Debt-to-Equity ratio fundamentally indicates the equilibrium between these two funding sources.
In other words, it resembles a basic instrument that indicates how a company finances its expansion and the level of risk it assumes. Understanding how to calculate this can truly assist you in making wiser financial decisions.
The debt-to-equity ratio (D/E ratio) is a financial metric that shows how much the company relies on debt relative to the money invested by the shareholders to fund its assets.
It tells us: For every rupee of equity, how much is the company's debt? That is, it shows how much debt a company uses to operate its business relative to what the shareholders have invested.
Debt-to-Equity Ratio = Total Debt/Shareholders’ Equity
Both the long-term and the short-term debts are accounted for, providing a sum of the financial position of the company.
Read also: What is debt-to-income ratio
A balanced ratio will draw investors and lenders, but a very high or low ratio can be cause for concern.
1. Identify Total Liabilities: Add all the short-term and long-term debt on the balance sheet.
2. Calculate Shareholders’ Equity: This is typically found in the balance sheet in the equity section as “Total Equity” or “Shareholders’ Funds”.
3. Apply the Formula: Total liabilities / Shareholders’ equity.
Example Calculation:
Suppose that XYZ Corp has ₹200 crore in liabilities and ₹500 crore in equity:
D/E = ₹200 crore/₹500 crore = 0.4
That is, the company uses ₹0.40 worth of debt per ₹1 worth of equity.
The debt to equity ratio is viewed differently based on the circumstances:
There is no rule of thumb, it varies depending on the industry. Capital-intensive industries such as steel or the automotive have a bit higher safe ratio, consumer businesses or technology companies tend to prefer a lower ratio. A ratio of 1 to 2 is generally good for most industries. Always look at industry averages for a fairer assessment.
Read also : What is a Debt Trap and How to Avoid It
Let's examine how some of India's largest companies employ debt and how their ratios affect their operations and financial well-being.
|
Company |
Debt-to-Equity Ratio |
Impact on Operations & Financials |
|
Adani Enterprises |
1.67 (FY24) |
Moderately high leverage supporting aggressive expansion across infrastructure and energy sectors. The ratio indicates a balance between leveraging growth opportunities and maintaining financial discipline. |
|
Tata Motors |
1.14 (FY24) |
Moderate leverage; supports global expansion (JLR), but rising debt has led to higher interest costs, negative cash flows, and increased vulnerability during industry downturns. |
|
Reliance Industries |
37.5% (Dec 24) |
A ratio of 0.375 means moderate leverage, well below the industry average of around 1.2 for energy and telecom sectors. Conservative leverage; strong equity base allows for steady growth, easier access to capital, and resilience during market volatility. |
|
Suzlon Energy |
0.0342 (FY24) |
Very low leverage; after aggressive deleveraging, the company now has greater financial stability, reduced interest burden, and improved investor confidence. |
|
Tata Steel |
109.8% (Dec 24) |
High leverage enables large-scale acquisitions and expansion, but substantial debt can limit ability to raise funds at competitive rates and increases exposure to market volatility. |
|
ITC |
0.4% (Dec 24) |
Distinctly low leverage; ITC's operations are almost completely capitalized by equity and reserves. This extremely conservative capital structure maintains very low financial risk, strong liquidity, and provides scope for making investments. |
Adani Enterprises' debt to equity ratio is 1.67, which means that it has a moderately high level of debt. The company is funding its big infra, energy, and logistics projects with borrowed money. This kind of ratio is common for companies that need large amounts of money upfront. While this amount of debt allows the company to grow fast and take on big projects, it also raises financial risk. The company is at the mercy of interest rate fluctuations and requires stringent cash flow management to repay its debts.
Tata Motors’ ratio of 1.14 indicates a moderate level of leverage to fund its global expansion and product development. The company has, nonetheless, struggled with increasing debt, particularly in times of falling sales and economic uncertainty. High interest charges and negative cash flows have strained profitability, underlining the need to balance debt with operating performance.
A debt to equity ratio of 0.375 indicates that Reliance Industries maintains a balanced strategy for managing its funds. It employs some debt to finance growth but maintains it at a level that is low enough to remain stable. It indicates the use of equity and debt by the company, which enables it to stay flexible, maintain good credit ratings, and enjoy investor confidence while pursuing growth in other segments.
Suzlon Energy changed dramatically from a ratio of 1.75 in March 2023 to only 0.0342 in March 2024. The company has been successfully able to cut down its debt. By reducing its debt, Suzlon has drastically reduced its interest expense, improved cash flow, and regained investor confidence. This financial change prepares the company for steady growth in the renewable energy sector.
Tata Steel operates with a ratio around 1.1 (109.8% or 1.098), typical for the capital-intensive steel industry. This allows for large-scale investments and takeovers but can make it difficult for the company to borrow money at competitive prices and exposes it to global market fluctuations. It is essential to balance it for long-term profitability and stability.
ITC Ltd. stands out among Indian blue-chip companies for its extremely low debt to equity ratio – only 0.4% as of December 2024. This indicates that ITC employs very little long-term debt to fund its business, and instead leverages its healthy surplus and reserves heavily. In fact, ITC's short-term investments and cash (₹191 billion) are significantly higher than its total debt (₹3 billion), reflecting its better liquidity position.
1. Locate “Total Liabilities”: Sum up both short-term and long-term borrowings.
2. Locate “Shareholders’ Equity”: Usually found under the equity section.
3. Plug Values into the Formula: Divide total liabilities by shareholders’ equity.
Debt to equity ratio is not just a figure, it’s a window into a company’s financial soul. It explains how much a company depends on borrowed funds versus shareholders' funds, influencing day-to-day operations and long-term profitability. As seen with companies like Adani, Tata Motors, Reliance, Suzlon, ITC, and Tata Steel, the ratios’ implications are profound: it can fuel ambitious growth, invite financial risk, or signal a turnaround story.
At My Mudra, we believe that understanding such financial metrics is the cornerstone of smart decision-making. By tracking your company’s debt to equity ratio and comparing it with that of industry leaders, you can identify opportunities, steer clear of pitfalls, and make long-term plans for success. If you are an entrepreneur, investor, or just a finance enthusiast, take these pointers to make your next move – and remember, we’re here to help you every step of the way.
