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Debt to equity, interest coverage, and what speaks louder than the balance sheet
Published by The Retail Trader · AUG 09, 2026 · Features
Debt is not bad in itself. Many good businesses stand on debt. The danger is when the repayment burden gets bigger than the business's earnings — and this does not always show up immediately in the balance sheet.
It tells you how much debt stands against every rupee of shareholders' money. Low means safe, high means risk — broadly.
But it depends on the sector. Banks and NBFCs are in the business of lending itself, and there this ratio is read quite differently. High debt is also normal in infrastructure and real estate. The same number would be frightening in an IT company.
Interest coverage tells you how many times the company can pay its interest out of operating profit. It asks directly: do the earnings cover the interest or not.
This ratio getting close to 1 is the biggest red flag — it means all the earnings are going into interest alone. In such a case one bad quarter puts the whole company under pressure.
Profit is created on paper, interest is paid in cash. That is why operating cash flow matters: is the earning coming in as real cash or only in the ledger.
A company that has shown profit for years but whose operating cash flow is consistently weak — there the debt burden is far heavier than it looks on paper.
Check these things yourself in the annual report:
• The mix of short-term and long-term debt — a lot of short-term debt means refinancing risk every year.
• Whether the promoters' shares have been pledged — pledged shares are a hidden sign of debt.
• Contingent liabilities — what is not debt right now but could become so. These are in the notes, not in the main statement.
• The trend in interest cost — if earnings are flat and interest cost is rising, the story explains itself.
The question is not how much debt the company has. The question is what the company built with that debt, and whether its earnings can carry that debt without strain. The first is a number, the second is understanding — and the loss always comes from the second place.
This article is for educational purposes only — it is not a buy or sell recommendation, makes no claim of guaranteed returns, and is not advice. Rules, rates and mechanics are changed from time to time by the exchanges, SEBI and RBI, so verify every number yourself with your broker or an official source.