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Considering an operating lease?
Lease machinery, equipment and fit-outs from ₹25 lakh to ₹100 crore.
Check eligibilityWhat debt-to-equity measures
The ratio compares what a company owes its lenders with what its owners have put in and kept in the business. Four choices shape the number.
1
Debt: usually long-term and short-term borrowings, including the current portion of term loans. Some definitions add lease liabilities.
2
Equity: share capital plus reserves and surplus, often called net worth. Some lenders deduct intangibles to get tangible net worth.
3
Book or market values: lenders generally use book figures from the balance sheet; analysts sometimes use market values.
4
The covenant definition: a loan agreement sets out exactly what counts as debt and equity for its tests.
A ratio of 1 means debt equals equity. Higher ratios mean more financial risk and less room to borrow, though what is normal varies widely by sector.
When the ratio matters most
Debt-to-equity carries most weight when you are about to add funding, or when lenders test their covenants.
WHAT CHANGES
Matters more
Matters less
Funding plans
Raising a large new loan or lease
Small top-ups within existing limits
Loan covenants
A maximum ratio is written in
No leverage covenant
Business type
Capital-intensive or cyclical sectors
Stable cash flows, light asset base
Equity base
Thin or falling
Strong and growing
How to calculate it
Debt-to-equity = total debt ÷ shareholders' equity. Take both figures from the same balance sheet date, and use the definitions your lenders use.
Decide what counts as debt.
Include term loans, working capital borrowings and debentures. Under Ind AS, check whether lease liabilities are in or out for each covenant and comparison.
Use net worth carefully.
Accumulated losses reduce equity and push the ratio up. Some lenders also use TOL/TNW, which counts all outside liabilities, not just borrowings.
An operating lease under Indian GAAP adds no debt, but lenders may still count its rentals as a commitment.
Where it shows up
Testing a covenant before a ₹10 crore line
ILLUSTRATIVE
A manufacturer reporting under Ind AS has ₹40 crore of debt and ₹50 crore of equity: a ratio of 0.8. Its loan covenant caps the ratio at 1.0. Buying a ₹10 crore production line with a new loan would take debt to ₹50 crore and the ratio to 1.0, right at the cap. Leasing the line instead adds a lease liability equal to the present value of rentals, say ₹8 crore. If the covenant counts lease liabilities, the ratio becomes 0.96 (48 ÷ 50); if not, it stays at 0.8. The CFO reads the loan agreement first.