Why debt-to-equity ratio (D/E) matters to a first-time founder
The D/E ratio shows how heavily a company relies on debt compared with owners’ capital. A higher ratio can increase returns when business is strong, but repayments and interest remain due when revenue falls. Founders, lenders, and investors use it to discuss financial risk. Meaningful interpretation depends on the industry and on exactly which debts and equity figures were included.
Examples of debt-to-equity ratio (D/E)
A company reports ₹30 million of total debt and ₹20 million of shareholders’ equity. Its D/E ratio is ₹30 million divided by ₹20 million, or 1.5. It has ₹150 of debt for each ₹100 of equity. If the comparison uses only interest-bearing debt, the result may differ, so the founder should label the calculation rather than quote 1.5 without context.
Common misunderstanding
D/E is not a percentage of assets and does not directly show whether this month’s bills can be paid. The formula is debt divided by shareholders’ equity. Analysts differ on whether debt means all liabilities, interest-bearing borrowings, or net debt after cash. Negative equity can make the ratio misleading or not meaningful, rather than simply producing an unusually favourable answer.
When to use it
Use the D/E ratio when considering a new loan, reviewing financing risk, or comparing similar companies over time. Calculate it consistently from the same accounting basis and read the debt terms alongside it. Early companies with unstable or negative equity need cash forecasts and repayment schedules more than this ratio. Check lender definitions because covenants may specify their own formula.