Debt-to-Equity ratio (D/E)

General
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How can I utilize Debt-to-Equity ratio (D/E) for evaluating the financial health of a company while trading on Alice Blue?

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The Debt-to-Equity ratio (D/E) is a significant metric in fundamental analysis that gives investors an
understanding of a company’s financial leverage. It is calculated by dividing a company’s total liabilities
by its shareholder equity. A higher D/E ratio indicates that more of the company’s operations are
financed by lenders rather than by shareholders, which can be a warning sign.
On Alice Blue, you’ll find the D/E ratio listed under the ‘Fundamental Analysis’ section for individual
stocks. Here’s how you can use this in your analysis:

Interpreting the D/E Ratio:

A lower D/E ratio is typically preferred as it indicates lower financial risk. However, what is considered
‘high’ or ‘low’ can vary significantly depending on the industry. For instance, in capital-intensive
industries like infrastructure or telecommunications, a higher D/E ratio might be more common.

Industry Comparison:

Compare the D/E ratio of your selected company with the average D/E ratio of its industry. As of the end
of 2022, for instance, let’s say the average D/E ratio of the FMCG sector in India was 0.5. If Hindustan
Unilever (HUL) had a D/E ratio of 0.3, it could suggest HUL is less risky compared to its peers.

Historical Analysis:

Review the company’s D/E ratio over the past five years. If the D/E ratio is increasing, it might suggest
the company is taking on more debt, which could lead to financial instability. Conversely, a decreasing
D/E ratio might indicate a company is relying less on debt to finance its operations.

Here is a table demonstrating a hypothetical analysis:

Here is a table demonstrating a hypothetical analysis:

Company D/E Ratio 2023 D/E Ratio 2022 D/E Ratio 2021 D/E Ratio 2020 D/E Ratio 2019
HUL 0.3 0.35 0.37 0.40 0.42
ITC 0.5 0.52 0.54 0.55 0.56

This table depicts that HUL has a lower and steadily decreasing D/E ratio compared to ITC over the past.

It’s essential to remember that while D/E ratio is a valuable tool, it is not a definitive indicator of a
company’s financial health. Always use it in conjunction with other financial metrics to make informe
d decisions.