Debt to Equity Ratio and Interest Coverage Ratio: How to Check Whether a Company's Borrowing Is Under Control

The debt to equity ratio is the quickest way to see how much of a company's funding comes from lenders instead of owners. Paired with the interest coverage ratio, it tells you whether the company can comfortably afford that borrowing.

This guide explains both formulas, what counts as high or low by sector and the warning signs that deserve a closer look.

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What Is the Debt to Equity Ratio?

The D/E ratio is total debt divided by shareholders' equity. A company with debt of Rs 50 crore and equity of Rs 100 crore has a ratio of 0.5. It means lenders have funded half as much as owners have.

Some analysts use net debt, which subtracts cash from debt, to show the burden after using available cash. Check which version your data source uses before comparing companies.

What Is the Interest Coverage Ratio?

The interest coverage ratio equals EBIT divided by interest expense. If operating profit is Rs 30 crore and interest is Rs 6 crore, coverage is five times. It shows how many times the company can pay its interest from operating profit. A ratio near one means almost all operating profit goes to lenders.

How to Read the Two Ratios Together

Debt to equity	Interest coverage	Reading
Low	High	Comfortable borrowing
High	High	Heavy debt but well supported by profits
Low	Low	Little debt, but weak profits
High	Low	Risky, small profit cushion against large debt

The last row is the one to avoid. A company with high debt and thin coverage has little room for a bad quarter.

What Counts as High Debt?

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There is no universal limit. Capital-intensive sectors such as power, infrastructure and telecom carry more debt than software or consumer firms. Banks and NBFCs borrow as part of their business, so the ratio is not used the same way for them. Compare with the sector and with the company's own history.

Warning Signs to Watch

• Debt rising faster than equity or profit for several years.
• Interest coverage falling toward two times or lower.
• A downgrade in credit rating or repeated refinancing.
• Heavy short-term borrowing used for long-term projects.
• Weak operating cash flow while debt keeps growing.

The Sensex companies range from almost debt-free technology firms to heavily borrowed infrastructure names, which shows why one number cannot fit every sector.

Using the Ratios Wisely

Read both ratios across five years, on the balance sheet and the profit and loss statement. Check how the company plans debt repayment, and compare borrowing costs with returns on new projects. Debt is not bad by itself, since it can lift growth, but it magnifies both gains and losses.

Some analysts call this measure gearing, and a company with high gearing and thin coverage deserves a careful look. Check the debt-to-equity figure each quarter, since a rising debt-to-equity trend matters more than one reading. Working capital loans add to short-term debt, and a solvency ratio such as this one should be read with them.

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Conclusion

The debt to equity ratio shows how heavily a company borrows, and interest coverage shows whether profits can carry the interest. Read them together, compare with sector peers and watch the trend.

Low debt with strong coverage is comfortable, while high debt with weak coverage is the combination to avoid.

Frequently Asked Questions

What is a good D/E ratio?

Ans. It depends on the sector. A ratio below one is often seen as comfortable for many businesses, while capital-intensive sectors may run higher. Compare with peers and look at the trend rather than a single year.

What is the interest coverage ratio?

Ans. It is EBIT divided by interest expense. It shows how many times a company's operating profit can cover its interest payments. A higher ratio means a larger safety cushion.

What is a dangerous interest coverage ratio?

Ans. A ratio close to one means almost all operating profit goes to interest. Many analysts get cautious when coverage falls toward two times or lower, though norms differ by sector and cycle.

Is zero debt always good?

Ans. Not always. A debt-free company is safe from interest costs, but a business that never borrows may be missing low-cost growth funding or may simply be small. Judge it by growth, returns and cash flow too.

Why is the D/E ratio not used for banks in the same way?

Ans. Banks and NBFCs borrow, mainly through deposits, as the core of their business. Their ratios look high by design, so analysts use capital adequacy and asset quality measures instead.

How does debt affect share price risk?

Ans. Heavy debt makes profits more sensitive to downturns, because interest must be paid regardless. In a weak year, highly borrowed companies often fall more than low-debt peers.

Where can I find debt and equity figures?

Ans. They are on the balance sheet in the company's quarterly and annual filings on the NSE and BSE websites, and on most research platforms, which also show the ratio directly.