| Definition |
Measures the proportion of a company's total debt to its shareholders' equity. |
Indicates how easily a company can pay interest on its outstanding debt. |
| Formula |
Total Debt / Shareholders' Equity |
EBIT / Interest Expense |
| Purpose |
Assesses the company's financial leverage and capital structure. |
Evaluates the firm's ability to meet its interest obligations from operating profits. |
| Indicates |
How much debt a company uses to finance its operations relative to equity. |
Whether a company generates enough earnings to cover its interest payments. |
| High Ratio Means |
More debt compared to equity, indicating higher financial risk. |
Company is comfortably able to pay interest; strong financial health. |
| Low Ratio Means |
Less debt relative to equity; conservative financing strategy. |
Company may struggle to pay interest, signaling financial distress. |
| Risk Reflection |
Reflects long-term solvency and potential bankruptcy risk. |
Reflects short-term liquidity and debt-servicing capacity. |
| Used By |
Investors, lenders, analysts assessing leverage and funding stability. |
Credit analysts, banks, and investors assessing repayment ability. |
| Ideal Range |
Varies by industry, but often below 1.5 is considered healthy. |
Greater than 3 is generally considered safe; < 1 is risky. |
| Financial Statement |
Balance Sheet |
Income Statement |
| Type of Ratio |
Leverage Ratio |
Coverage Ratio |
| Focus Area |
Long-term financial structure. |
Operational efficiency in managing interest payments. |
| Impact on Credit Rating |
High ratio can lead to credit downgrades. |
Low ratio may signal difficulty in meeting obligations, affecting creditworthiness. |
| Time Frame |
More static; reflects financial position at a point in time. |
Dynamic; reflects performance over a period. |
| Improved By |
Reducing debt or increasing equity capital. |
Increasing operating profits or reducing interest expenses. |
| Applicable For |
Evaluating capital structure and funding risks. |
Assessing interest payment sustainability and debt burden. |
| Limitations |
Doesn’t reflect short-term liabilities or interest costs. |
Doesn’t account for principal repayments or long-term debt levels. |
| Example |
A D/E ratio of 2 means the company has ₹2 in debt for every ₹1 in equity. |
An ICR of 5 means the company earns 5 times its interest expense. |
| Stakeholder Interest |
Equity investors, long-term lenders, regulators. |
Short-term lenders, creditors, rating agencies. |
Debt-to-Equity Ratio vs Interest Coverage Ratio