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Should you invest in a company with high Debt to equity Ratio

Every investor’s investment decision majorly looks for companies which have low debt in their books, as such companies normally stand out in adverse macro scenarios.  This ratio indicates how much is the company leveraged itself for the working of its business. Total Debt to Equity Ratio is one of the important Solvency ratios. Let us discuss it:

Total Debt to Equity Ratio

Debt to Equity ratio measures a company’s financial leverage. This ratio is calculated by dividing a company’s total debt by its net worth. It indicates how much debt a company is using to finance its assets. If the debt to equity ratio is less than 1 then the company is expected to be financially strong as assets to be more than liabilities but if it’s more than 1 then its expected to be highly leveraged thus solvency will be questionable as liabilities will be higher than assets. A higher debt to equity ratio is preferable if the business is unique and dynamic or monopolistic in nature and doing exceptionally well.

Importance of Total Debt to Equity Ratio:

High Debt to Equity ratio indicates that the company has been aggressive in financing the growth with debt. This indicates a high level of risk. High Debt to Equity ratio may also result in volatile earnings as a result of an increase in interest expenses. If the debt to equity ratio continues to rise then such company gets impacted more when macros turn adverse like weakening rupee or rising interest rates.

Formula:

The formula for calculating Debt to Equity ratio is:

Debt to Equity ratio= Total Liabilities/ Total Equity

For example:

Company ABC’s total debt is Rs. 15, 00,000 and its total shareholder’s equity accounts for Rs. 10,00,000 then using the formula of High Debt to Equity ratio (1500000/1000000) we get 1.5 times or 150%

Nowadays we don’t have to calculate Debt to Equity ratio on our own. StockEdge gives us Debt to Equity ratio of the last five years of any company listed in the stock exchange. We can look and compare Debt to Equity ratio of any company and filter out stocks accordingly.

Suppose we want to look at Debt to Equity ratio of Suven Life Sciences Ltd. For last 5 years then in the Fundamental tab of Suven Life Sciences Ltd, click on the fundamentals tab, we will get Ratios tab.  Then in the Ratios tab click on the Solvency Ratios, we will get Debt to Equity ratio of Suven Life Sciences Ltd.

Debt to Equity Ratio

Bottomline

Debt to Equity ratio is a useful financial ratio as it is used to measure the Company’s financial leverage. It is used to measure the company’s ability to repay its obligations. This ratio is available with every stock under stockedge app for free. Thus if you have not downloaded this app till now then you are missing on your investment opportunity. Download this app right now and enjoy all these ratios for free.

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