If you’re someone running a home bakery, freelancing as a graphic designer, running a tuition centre, or managing a local service like a mobile repair shop—you’ve probably wondered: “Do I really need to understand all these financial ratios?” or “Is this topic too technical for me?”
The truth is, understanding your debt-to-equity ratio isn’t just for finance experts or accountants. It’s for every Indian small business owner who wants to grow steadily without sinking into unwanted debt. You don’t need a commerce degree to grasp this concept. You just need a little curiosity and a willingness to understand how your business is truly performing.
Let’s walk through it together.
What Exactly Is the Debt-to-Equity Ratio?
The debt-to-equity ratio simply tells you how much of your business is funded by borrowed money (loans, dues) versus your own money (your savings or profits reinvested). Think of it as a mirror—it reflects whether your business stands more on your own legs or leans heavily on borrowed crutches.
Take, for instance, a young entrepreneur running a mobile repair shop in Pune. She puts in ₹2 lakh of her savings to start the shop and takes a ₹5 lakh business loan to buy tools and rent the space. In this case, her debt-to-equity ratio is 2.5. That means for every ₹1 she invested, ₹2.50 came from borrowed funds.
That number is more than just math—it tells us about her business’s dependence on loans. It shows whether she’s financing growth sustainably or putting too much pressure on future earnings to repay that debt.
Why This Ratio Matters for Your Business Health
This one number can tell you a lot about your business’s financial health. Debt-to-Equity Ratio shows how much risk you’re carrying, especially in the eyes of banks, investors, and even your own future self.
A high D/E ratio might mean you’re paying large amounts in interest, which eats into your profits. On the other hand, too little debt might suggest you’re not taking enough financial leverage to grow when needed.
For example, imagine a coaching centre owner in Hyderabad. She already invested ₹5 lakh of her own money and now wants to open a second branch. She takes a ₹3 lakh loan. Her debt-to-equity ratio is 0.6. That’s a comfortable position—she’s expanding, but still mostly using her own capital.
Now consider a freelance content writer who takes a ₹1 lakh personal loan to upgrade her setup, while only having ₹30,000 in savings. Her ratio shoots up to 3.33. That’s risky, especially if her income isn’t stable. In this case, the debt can become a burden.
How to Calculate the Debt-to-Equity Ratio
To calculate your D/E ratio, you need two numbers from your balance sheet:
- Total liabilities – This includes all loans, vendor payments you owe, credit card dues used for business, etc.
- Shareholders’ equity – This is your own capital investment plus any profit you kept in the business (instead of withdrawing it).
Example
Let’s say you own a small garage in Delhi. You took a ₹4 lakh loan from the bank and owe ₹1 lakh to a spare parts vendor. That’s ₹5 lakh in liabilities. If you invested ₹3 lakh of your own funds into the garage, your D/E ratio is 1.67.
That means your borrowed funds are 1.67 times your own investment.
Many small business owners forget to include retained earnings—profits they’ve reinvested—when calculating equity. This can make their D/E ratio look worse than it really is.
What Your D/E Ratio Says About You
Understanding what your Debt-to-Equity Ratio means is key to managing growth.
If your ratio is below 1, it means you’re mostly funding your business with your own money. That’s usually a low-risk, healthy setup.
A ratio between 1 and 2 is considered balanced—you’re using debt but not depending on it too heavily.
But if it goes above 2, lenders might view your business as risky unless you’re in an industry where borrowing is common.
Banks often compare your ratio to others in your industry. A food delivery startup might be comfortable with a D/E of 2.5, but for a home-based candle maker, that same number may trigger concern.
When It’s Okay to Have a High D/E Ratio
Not all high ratios are bad. Some sectors operate with a naturally high reliance on debt. Utilities, banks, NBFCs, and high-growth tech startups often have high debt-to-equity ratios because of the kind of work they do and the scale they aim for.
But for most small businesses—like coaching centres, printing units, or service providers—a high ratio above 2 might signal over-dependence on loans. It’s better in such cases to either reinvest profits or bring in more equity instead of piling on more loans.
Why the Type of Debt Matters
Short-term and long-term debts are very different when it comes to financial health.
Short-term debt includes vendor dues, salaries payable, or temporary credit lines—things you must repay quickly.
Long-term debt includes machinery loans, shop leases, or equipment EMIs—more planned and spread out over time.
Example
Let’s take a bike mechanic who borrows ₹1 lakh. ₹70,000 is short-term to manage parts supply, and ₹30,000 is a loan for a new lift.
If his own capital is ₹1.5 lakh, his total D/E is 0.67, but the long-term part is just 0.2. That shows he’s not overburdened by long-term obligations.
Where Many Small Businesses Go Wrong
The most common mistake is fearing all debt. Debt isn’t always dangerous.
A delivery agent borrowing for a second bike may actually earn more by expanding wisely. The problem starts when debt is taken without a plan—or when business owners don’t even realize how much they owe.
Another blind spot? Ignoring informal debts. Money owed to wholesalers or vendors, even if no formal contract exists, still counts. And lastly, many owners forget that reinvested profits count toward equity. Missing these can make your ratio look worse than it actually is.
Modified Ratios: A Smarter Way to Look at Risk
You can go beyond the basic D/E ratio by adjusting for real-world conditions:
- Long-Term D/E focuses only on the debt that stretches over years—more useful for planning growth.
- Net D/E subtracts cash reserves from your debt. After all, if you have cash, your loan burden isn’t as heavy.
For instance, suppose you have ₹10 lakh in loans and ₹4 lakh sitting in the bank. If your equity is ₹5 lakh, your net D/E ratio becomes 1.2 instead of 2. This paints a much more accurate picture of your true financial risk.
The D/E Ratio in Your Personal Finances
Just like in business, your personal debt level matters too. The personal debt-to-equity ratio compares what you owe (like home or car loans) to what you actually own (like your home, gold, or investments).
Let’s say your assets total ₹60 lakh, and your loans add up to ₹45 lakh. That leaves you with a net worth of ₹15 lakh. Your personal D/E ratio is 3.0. That means you owe ₹3 for every ₹1 of wealth you own. This is a sign to slow down on new loans and focus on building assets.
Know What’s Normal in Industry
Different industries carry different levels of debt as standard practice.
A gym in Ahmedabad might need a lot of machines and equipment, pushing its D/E ratio to 2.8. But a home-based tutor in Jaipur could run debt-free with a ratio of 0.
Here’s a rough idea of what’s typical:
- Utility companies: 2.5–3.5+
- Banks/Finance: Up to 10+
- Manufacturing: 1–2
- Retail or local services: 0.5–1.5
- Freelancers/Tutors: 0–0.5
Before applying for any loan, compare your D/E ratio to your industry average. Lenders will be making this comparison anyway—so it’s best if you know where you stand.
Final Thoughts: Take Control of Your Debt
When you understand your debt-to-equity ratio, you’re no longer in the dark about your financial health. Whether you’re a freelancer, a homepreneur, or running a local business, this one number gives you a compass.
Debt isn’t something to fear—it’s something to manage. And with the right balance of borrowed funds and personal investment, you can fuel your business the smart way. So the next time someone mentions the D/E ratio, you won’t feel lost. You’ll feel in control.
