What is Debt-to-Equity Ratio?
Nexa Consultancy | Startup & Finance Glossary
The Debt-to-Equity (D/E) ratio is a leverage ratio that compares a company's total liabilities to its shareholders' equity. It is a key metric used to evaluate a company's financial leverage and risk. A higher D/E ratio indicates that the company has been more aggressive in financing its growth with debt.
For Startups: Most early-stage startups are funded by equity and have very little debt, resulting in a low D/E ratio. As a startup matures, it might take on venture debt or other loans, which will increase this ratio. Investors monitor the D/E ratio to assess the risk profile of the business; too much debt can be a red flag, as it increases the risk of bankruptcy.
Calculation: Debt-to-Equity Ratio = Total Liabilities / Total Shareholders' Equity.
Example: A company has total liabilities of ₹1 Crore and shareholders' equity of ₹2 Crore. Its D/E ratio is 0.5.