The D/E ratio is thus, the ratio of the amount invested by outsiders to the amount invested by the owners of the business.



It is an important tool of financial analysis to appraise the financial structure of a firm. It has important implications from the view point of creditors, owners & the firm itself.


A high ratio shows a large share of financing by the creditors of the firm while a lower ratio implies smaller claim by creditors. It indicates the margin of safety to creditors.


For ex: If the D/E ratio is 2:1, it implies for every rupee of outside liability, the firm has two rupees of the owner’s capital. Hence there is a safety of margin of 66.67% available to the creditors of the firm. Conversely if the D/E ratio is 1:2, it implies low safety of margin for the creditors.


A high D/E ratio has equally serious implications from the firm’s point of view. It would affect the flexibility of operations of the firm, restrict the borrowings etc. the shareholders would however gain in 2 ways:-

i)  with a limited stake they would be able to retain control of the firm.

ii) The returns would be magnified.

A low D/E ratio would have just the opposite implications.

The following two tabs change content below.
We, at, believe in sharing knowledge and giving quality information to our BMS students. We are here to provide and update you with every details required by you BMSites! If you want to join us, please mail to [email protected]

Leave a reply is aimed at revolutionising Bachelors in Management Studies education, also known as BMS for students appearing for BMS exams across all states of India. We provide free study material, 100s of tutorials with worked examples, past papers, tips, tricks for BMS exams, we are creating a digital learning library.

Disclaimer: We are not affiliated with any university or government body in anyway.

©2020 BMS - Bachelor of Management Studies Community 

A Management Paradise Venture

Ask Us On WhatsApp

Log in with your credentials


Forgot your details?


Create Account