What is debt-to-equity?
A company pays for its assets with two kinds of money: the owners’ money (equity) and other people’s money (loans and other liabilities). The debt-to-equity ratio compares the two. In one common version, debt-to-equity = total liabilities ÷ shareholders’ equity. A ratio of 2 means two taka of liabilities for every taka the owners have put in.
Many analysts count only interest-bearing debt (bank loans, bonds and so on) and leave out liabilities such as money owed to suppliers. The two methods can give very different numbers. So check which definition is being used, and stick to the same one when comparing.
Say Karim sets up a small poultry farm for Tk 10 lakh: Tk 5 lakh of his own and Tk 5 lakh borrowed. His debt-to-equity is 1. His neighbour Selim builds the same farm with Tk 2 lakh of his own and Tk 8 lakh borrowed; his ratio is 4. In a good year Selim may earn a higher return on his own money, but if disease strikes or feed prices rise, he is the one who will struggle first to pay his instalments. The numbers are only an example.
Why it matters to an investor
- To judge risk: interest and repayments are due whether or not there is a profit. With heavy debt, surviving a bad patch is harder.
- To know where shareholders stand in the queue: if a company closes, lenders are paid first and shareholders last, from whatever is left.
- To read ROE properly: heavy debt makes ROE look bigger, so check debt-to-equity whenever you look at ROE.
- To see how interest rates bite: Bangladesh capped lending rates at 9% from April 2020 until the cap was lifted on 1 July 2023. Average lending rates rose afterwards; banks’ weighted average was 11.86% in June 2026. Rates change, and heavily indebted companies feel it most.
Debt magnifies profit and loss
If a business earns more on borrowed money than the interest it pays, the extra goes to the owners. Debt then lifts ROE. But if earnings fall below the interest cost, the reverse happens: the interest is still due in full, so the owners’ profit shrinks fast or turns into a loss. This is called leverage, or financial leverage.
How much debt is “too much”? It depends on the business
- There is no single yardstick. For banks and finance companies, deposits are themselves liabilities, so their ratio is naturally far higher; they can’t be compared with other companies.
- A business with steady, regular income can carry somewhat more debt; for one whose income is seasonal or swings, the same debt is riskier.
- How a company’s ratio changes over the years tells you more than any single number. Debt that is climbing fast is a reason to ask questions.
What to check alongside it
- Interest cover = profit before interest and tax ÷ interest expense. It shows how many times over the company’s earnings can pay its interest.
- Short-term versus long-term debt: a large amount due within a year puts pressure on cash.
- Cash flow: instalments are paid with real cash from the business, not with profit on paper.
- Negative equity: if accumulated losses push equity below zero, the ratio stops making sense, and that is a serious warning sign in itself.
Worked example
- Say two made-up companies each have Tk 100 crore of assets. “A” is funded entirely by its owners (ratio 0). “B” has Tk 50 crore of equity and Tk 50 crore of debt at 12% a year (ratio 1). To keep it simple, ignore tax.
- Good year, profit before interest of Tk 15 crore: A’s ROE is 15 ÷ 100 = 15%. B pays Tk 6 crore interest and keeps Tk 9 crore, an ROE of 9 ÷ 50 = 18%.
- Bad year, profit before interest of Tk 5 crore: A’s ROE is 5%. B still owes Tk 6 crore interest, so it makes a Tk 1 crore loss, an ROE of −2%.
Result: debt put B ahead in the good year and into a loss in the bad one. Debt does not make the business less risky; it only makes the owners’ share swing harder both ways. The numbers are only an example.
Common mistakes
- Treating all debt as bad. The right amount can help a business grow; the question is whether the business can carry it.
- Comparing ratios across different industries, especially financial institutions against other companies.
- Being impressed by a high ROE without looking at the debt behind it.
- Assuming interest rates and access to credit will always stay the same.
Debt magnifies both the owners’ profits and losses: read debt-to-equity in the context of the industry, as a trend over several years, and alongside the ability to pay interest and the cash flow.