Finance · business glossary
What is Debt-to-equity ratio?
By Shivam Bhandari · Reviewed 31 October 2026 · How we write
definition
How much of a business is funded by borrowed money compared to the owner's own invested capital — a key measure of financial risk.
Debt-to-equity ratio explained
The debt-to-equity ratio compares how much a business has borrowed with how much the owners have invested.
formula
Debt-to-equity = Total debt ÷ Shareholders' equity
example
₹40 lakh of loans and ₹80 lakh of owners' equity gives a ratio of 0.5.
why it matters
Higher ratios mean more financial risk, because interest must be paid even in bad months. Lenders check it before approving loans.
common mistake
Assuming all debt is bad — sensible borrowing can fund growth without giving up ownership.
Frequently asked questions
What is Debt-to-equity ratio?
How much of a business is funded by borrowed money compared to the owner's own invested capital — a key measure of financial risk. The debt-to-equity ratio compares how much a business has borrowed with how much the owners have invested.
How do you calculate Debt-to-equity ratio?
Debt-to-equity = Total debt ÷ Shareholders' equity. ₹40 lakh of loans and ₹80 lakh of owners' equity gives a ratio of 0.5.
Why does Debt-to-equity ratio matter?
Higher ratios mean more financial risk, because interest must be paid even in bad months. Lenders check it before approving loans.
What is a common mistake with Debt-to-equity ratio?
Assuming all debt is bad — sensible borrowing can fund growth without giving up ownership.
Related terms
ROCE (return on capital employed)
How efficiently a business turns the total capital invested in it — both debt and equity — into operating profit.
Valuation
An estimate of what a whole business is worth, used when raising investment, selling, or bringing in a partner.
Cash flow
The actual movement of money in and out of a business, which can differ sharply from reported profit if customers pay late or inventory ties up cash.