Debt-Equity Ratio is a key financial metric that measures the proportion of a companyís total debt to its shareholdersí equity. It helps investors and analysts evaluate a companyís financial leverage and its ability to meet long-term obligations. This ratio is crucial in assessing how much of a companyís operations are financed through borrowed funds versus owned funds.

The Debt-Equity Ratio formula is: Debt-Equity Ratio = Total Debt / Shareholdersí Equity

A higher ratio indicates that a company relies more on borrowed capital, which can increase financial risk, especially if earnings are volatile. Conversely, a lower ratio reflects a more conservative approach, suggesting the company uses more equity financing and carries less debt burden. The ideal ratio varies by industry, but generally, a Debt-Equity Ratio below 1 is considered financially stable, while ratios above 2 may signal excessive leverage.

Importance of Debt-Equity Ratio:

• Financial Stability: It helps gauge the firmís ability to withstand economic downturns.
• Investor Confidence: A balanced ratio indicates sound financial management, which attracts investors.
• Creditworthiness: Lenders use this ratio to evaluate a companyís repayment capacity before extending loans.
• Performance Benchmarking: It allows comparison with industry peers to assess financial health.

For example, if a company has ?100 crore in debt and ?200 crore in equity, its Debt-Equity Ratio is 0.5, indicating a conservative capital structure. However, if the debt rises to ?300 crore, the ratio becomes 1.5, reflecting increased financial risk.

In conclusion, the Debt-Equity Ratio is an essential indicator of a companyís financial leverage. Maintaining an optimal balance between debt and equity helps ensure sustainable growth, lower interest costs, and long-term financial resilience.