Is high debt to equity ratio good or bad for a company?

The first thing that comes to the mind of most people after hearing the word ‘debt’ is 'burden'. However, in the corporate world, the company requires debt to expand its business. The debt-to-equity (D/E) ratio shows the extent to which the company is leveraged, so lower the ratio, better it is.

Generally, D/E ratio should be less than one as it lends financial stability. But there are capital-intensive industries like infra, capital goods, etc whose D/E ratio remain at higher levels compared with companies in other industries such as FMCG and IT, which are like cash-generating machines. Also, if the company is taking debt for future expansion that would lead to higher revenue and profitability, then such debt can be considered as healthy for the company.

However, if the company raises debt to meet its working capital requirement, then it is questionable as it cannot even meet its operating expenses with regular business income. Thus, we should stay away from such companies, which may not be able to service their debt on time.

Along with D/E ratio, investors should also look for interest coverage ratio. Higher D/E ratio does not mean we should not invest in the stock. Rather, we should look for interest coverage ratio which tells us how company is placed to service its debt. If the interest coverage is more than 2, then it means the company can easily service its debt.

We have shortlisted top 10 companies of BSE 500 with highest D/E ratio along with their interest coverage ratio in the table below:


 (Source: ACE Equity)