- The three debt ratios that matter, and the levels that should worry you
- Why interest coverage beats debt-to-equity as a danger signal
- Why the same debt is fine for one industry and lethal for another
Both took a ₹50 lakh loan and both pay ₹45,000 a month.
The first earns ₹3 lakh a month. The EMI is 15% of his income — comfortable. He can lose a bonus, take a pay cut, change jobs, and still pay.
The second earns ₹55,000 a month. The EMI is 82% of his income. He is not in trouble today. He is in trouble the day anything at all goes wrong.
Identical debt. Completely different risk. What matters is never the size of the loan — it's the loan relative to the income that services it.
Never ask "how much debt?" Ask "how comfortably does the profit cover the interest?" — that is the question the lender is asking too.
The three ratios
- Total debt
- long-term plus short-term borrowings
- Equity
- share capital plus reserves
- EBIT
- operating profit, before interest and tax
- Interest
- finance cost from the P&L
- Net debt
- debt minus cash on hand — what's really owed
- EBITDA
- a rough proxy for annual operating cash generation
Both carry ₹500 Cr of debt against ₹500 Cr of equity — D/E of exactly 1.0.
- Company A — EBIT
- ₹280 Cr
- Company A — interest
- ₹45 Cr
- Company A — EBITDA
- ₹360 Cr
- Company B — EBIT
- ₹70 Cr
- Company B — interest
- ₹48 Cr
- Company B — EBITDA
- ₹110 Cr
Debt is judged by industry, not by a universal line
- IT services, FMCG, pharmaTypical D/E: 0 – 0.3×Why: Capital-light and cash-generative — many carry net cash
- Auto, engineering, chemicalsTypical D/E: 0.3 – 1.0×Why: Factories need funding, but cash flow services it
- Cement, steel, powerTypical D/E: 0.5 – 1.5×Why: Enormous fixed assets; long payback periods
- Infrastructure, real estateTypical D/E: 1 – 3×Why: Project finance is the model — and the sector's recurring cause of death
- Banks and NBFCsTypical D/E: 6 – 12×Why: Not comparable. Borrowing and lending is the business; judge on capital adequacy instead.
A steel company at the top of the cycle might show interest coverage of 9× and look conservatively financed. Then steel prices fall 40% — as they periodically do — EBITDA halves, and coverage drops to 2×.
For cyclical businesses, test the debt against mid-cycle or trough profits, not peak profits. Take the worst EBITDA of the last ten years and re-compute coverage with today's debt. If that number is below 2×, the balance sheet is not built for the industry it's in.
The debt details most people miss
- Maturity mismatch. Short-term loans funding long-term assets. The factory takes fifteen years to pay for itself; the loan is due in twelve months. This works until the day the lender declines to roll it over — which is always the worst possible day.
- Contingent liabilities. Guarantees given for subsidiaries or group companies, disputed tax demands, pending legal claims. These sit in the notes, not on the balance sheet, and they become real debt the moment things go wrong.
- Debt hiding in subsidiaries. The parent looks clean; the group is levered. Always read consolidated.
- The cost of the debt. Interest ÷ average debt gives the effective rate. A company paying 14% when peers pay 9% is being priced as risky by lenders — who have seen the accounts up close and have money at stake.
- The direction. Debt falling while the business grows is one of the most reliable good signs in all of investing. Debt rising every year to fund normal operations is one of the worst.
Five years of the same company, ₹ crore.
- Total debt FY21 → FY25
- 420 → 465 → 540 → 640 → 780
- EBITDA FY21 → FY25
- 180 → 176 → 168 → 155 → 140
- Interest cost FY21 → FY25
- 38 → 44 → 54 → 68 → 86
- ✓Interest coverage above 5× and stable
- ✓Net debt below 2× EBITDA
- ✓Debt falling while revenue grows
- ✓Borrowing matched to asset life — long assets, long loans
- ✓Effective interest rate in line with peers
- ✕Interest coverage below 2×, or falling year after year
- ✕Net debt above 4× EBITDA
- ✕New borrowing every year to fund working capital
- ✕Short-term debt funding long-term projects
- ✕Interest rate well above peers — lenders know something
- ✕Large contingent liabilities and group guarantees in the notes
- ☐Interest coverage — this year and each of the last five.
- ☐Net debt ÷ EBITDA, read as years.
- ☐Debt trend against revenue trend over five years.
- ☐For cyclicals: re-run coverage on the worst EBITDA of the last decade.
- ☐Short-term vs long-term debt mix — any maturity mismatch?
- ☐Effective interest rate vs peers.
- ☐Search the notes for contingent liabilities and guarantees.
See it live · Leverage is a scoring pillar in every report here, and severe debt findings can cap a company's overall score however good the rest looks.
See flagged companies →In one screen
- 1Debt itself isn't the risk — debt relative to the profit that services it is.
- 2Interest coverage (EBIT ÷ interest) is the most informative single debt number.
- 3Net debt ÷ EBITDA reads as years-to-repay; above 4× is dangerous territory.
- 4Judge debt against the industry, and against trough profits for cyclicals.
- 5The trend over five years matters more than any single year's level.
Check yourself
Nothing is scored or stored — the explanation after each answer is the point.
Company A: D/E 1.8, interest coverage 7×. Company B: D/E 0.7, interest coverage 1.6×. Which is riskier?
A cyclical steel producer shows interest coverage of 9× at the top of the cycle. How should you test it?