When I started analyzing stocks, one thing confused me a lot – debt. Some companies had high debt, some had zero, and experts always talked about ratios. But why does debt matter? Analyzing companies debt and financials before investment should be top priority for every individual.
Debt to Equity Ratio – How Much Risk?
This ratio tells us how much a company has borrowed money compared to its own Shareholders Fund. Formula is simple:
Debt to Equity Ratio = Total Debt / Shareholder’s Equity
Let’s take Tata Motors as an example.
- Total Debt = ₹1,00,000 crore
- Equity (Shareholder’s Fund) = ₹40,000 crore
Debt to Equity = 1,00,000 / 40,000 = 2.5
This means Tata Motors has ₹2.5 of debt for every ₹1 of its own money. So , Is it risky? Definitely Yes, because high debt means it have to pay high interest.But auto companies need debt for expansion. So, Always we should compare with peers. If other auto companies have a ratio below 1, Tata Motors is taking higher risk.
Check this Debt to equity ratio benchmark before investing.
- Below 1 – Safe zone
- 1 to 2 – Moderate
- Above 2 – High risk
If a company has Debt to Equity above 2, It needs more analysis. Dig deeper into earnings and profitability. If company is making good profits then it should be any major problem. Because if company is taking debts , it should be for proper cause such as expansion.
Debt to Profit Ratio – Can It Repay?
Even if debt is high, a company may still be safe if it earns enough to repay it. This ratio helps us check that.
Debt to Profit Ratio = Total Debt / Net Profit
Example: Vedanta Ltd
- Total Debt = ₹60,000 crore
- Net Profit = ₹10,000 crore
Debt to Profit = 60,000 / 10,000 = 6
This means it will take 6 years of full profit to clear the debt. Is it bad? Not always. If Vedanta’s profit is rising and they manage cash flow well, it’s fine. But if profit is falling, the company is in trouble.
What’s a good number?
- Below 3 – Very good (Debt is under control)
- 3 to 6 – Okay, but needs stable profits
- Above 6– Risky (Check future growth and cash flow)
Example: HUL (Hindustan Unilever) has almost zero debt. Its ratio is near 0. This is why investors love it – no risk of repayment pressure!
Interest Coverage Ratio – Can It Pay Interest Easily?
Even if a company has high debt, it must at least pay interest regularly. Otherwise, banks will take action.
Interest Coverage Ratio = EBIT / Interest Expense
(EBIT = Earnings Before Interest & Tax)
Example: Bharti Airtel
- EBIT = ₹20,000 crore
- Interest Cost = ₹5,000 crore
Interest Coverage = 20,000 / 5,000 = 4
This means Airtel earns 4 times more than its interest cost. That’s a good sign. But if this ratio drops below 2, the company may struggle to pay interest.
How to Analyse?
- Above 3 – Safe (Interest is easily covered)
- 2 to 3 – Manageable (Keep an eye on profits)
- Below 2 – Danger (Company may default if profits fall)
Example: Jet Airways had an interest coverage ratio below 1 before bankruptcy. It couldn’t pay interest, and banks stopped lending.
Industry-Specific Debt Considerations
Not all industries follow the same debt rules. Some industries naturally operate with high debt, while others should avoid it:
- Banks & NBFCs – Always have high debt, as they borrow to lend further. Instead of Debt to Equity, check Net NPA (Non-Performing Assets) and Capital Adequacy Ratio.
- Infrastructure & Telecom – Often have high debt due to long-term investments. Look for stable revenue and government backing.
- FMCG & IT – Should have low debt since they generate strong cash flows. A high Debt to Equity in these sectors is a warning sign.
How to Use These Ratios in Real Investing?
I don’t just look at one ratio. I check all three together.
👉 Case 1: Safe Company (HUL, TCS)
- Debt to Equity: Near 0 (No risk)
- Debt to Profit: Below 3 (Earnings are strong)
- Interest Coverage: Above 10 (No pressure)
✅ Perfect for long-term investment!
👉 Case 2: Moderate Risk (Tata Motors, Airtel)
- Debt to Equity: 2-3 (High debt, but industry requires it)
- Debt to Profit: 4-6 (Profits must stay stable)
- Interest Coverage: 2-3 (Can manage interest for now)
⚠ Check future earnings growth before investing.
👉 Case 3: High Risk (Vedanta, Vodafone Idea)
- Debt to Equity: Above 3 (Too much borrowed money)
- Debt to Profit:Above 6 (Too long to repay)
- Interest Coverage: Below 2 (Interest not covered well)
❌ Avoid unless turnaround plan is strong.*
Final Thoughts – What I Follow?
1️⃣ I always compare debt with industry peers. A telecom company may have high debt, but an FMCG company should not.
2️⃣ If Debt to Profit is above 6, I check if future earnings will grow. If not, I avoid the stock.
3️⃣ If Interest Coverage falls below 2, I stay away. If a company can’t even pay interest properly, what’s the guarantee it will survive?
I have seen many investors lose money in debt-heavy stocks. Debt is not always bad, but if a company is borrowing too much without enough earnings, it’s a warning sign.
I hope this guide makes debt analysis easier for you. Keep checking these ratios before investing, and you will avoid big mistakes. Let me know if you need more examples!
Happy investing! 🚀
FAQ
1️⃣ Is high debt always bad for a company?
No. Some industries like banks, telecom, and infrastructure require high debt. But for FMCG and IT companies, high debt is risky.
2️⃣ What is a good Debt to Equity Ratio?
Below 1 is ideal. If it's above 2, check if the company's profits are stable.
3️⃣ How can I check a company’s debt before investing?
You can find debt details in the company’s balance sheet (under liabilities) and financial reports on NSE, BSE, or Screener.in.
4️⃣ Which Indian companies have zero debt?
Some zero-debt companies are HUL, Infosys, TCS, and Marico. These companies have strong profits and don’t need loans.
5️⃣ How do I know if a company is struggling with debt?
Look for Debt to Profit above 6 and Interest Coverage below 2. If both are bad, the company may struggle to repay loans.
6️⃣ Can a company reduce its debt?
Yes. Companies reduce debt by increasing profits, selling assets, or raising money through equity.
7️⃣ Which is more important: Debt to Equity or Interest Coverage?
Interest Coverage. Even if debt is high, if the company can easily pay interest, it is less risky.
8️⃣ Where can I check the Interest Coverage Ratio of a company?
Interest Coverage is in the company’s profit & loss statement, under EBIT and interest expenses. Websites like Screener.in and Moneycontrol also show it.
9️⃣ Why do banks have high Debt to Equity Ratios?
Banks borrow money to lend further, so high debt is normal. Instead of Debt to Equity, check their NPA (Non-Performing Assets) and Capital Adequacy Ratio.
10🔟What happens if a company can’t repay its debt?
If a company fails to pay interest, banks may stop lending, assets may be sold, or it may go bankrupt (like Jet Airways).
11️⃣ How often should I check a company’s debt?
Always check quarterly results. If debt increases without profit growth, it's a warning sign.
12️⃣ Is low debt always a good sign?
Not always. Some companies avoid debt but grow very slowly. A small amount of debt can help companies expand.
13️⃣ How do I compare a company’s debt with competitors?
Go to Screener.in or Moneycontrol, check Debt to Equity and Interest Coverage for multiple companies in the same sector.
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