Debt ratios
How much a company or a household owes, and whether its income can carry the payments
Company figures for April to June 2026, released by RBI on 27 August 2026
Verified 16 October 2026
For training and education only. Not investment advice.
Trainer notes
Ask: two companies earn the same profit. One has borrowed heavily, the other hardly at all. Which one is hurt more if profit falls by a third? Most will guess the right answer; slide 4 shows by how much. The deck covers company ratios first, then the household versions.
Debt is neither good nor bad in itself. What matters is its size, and whether income covers the payments.
Debt ratios put a number on both questions. The same two ideas apply to a company and to a household.
Trainer notes
Borrowing lets a business or a family buy something sooner than its own money allows. The cost is a fixed payment that falls due whether income is good or bad. Every ratio in this deck measures one side of that trade.
Four company ratios
- D/E
Debt-equity
Borrowings ÷ net worth. How many rupees the company has borrowed for every ₹1 its owners have put in or kept in.
- ICR
Interest coverage
Profit before interest and tax ÷ interest. How many times over this year's profit pays this year's interest.
- DSCR
Debt service
Cash available for lenders ÷ interest plus principal due. Like coverage, but it counts repayments too.
- CR
Current ratio
Current assets ÷ current liabilities. Can bills due within a year be met from assets that turn to cash within a year?
Take-away: Net worth (equity) is what the company owns minus what it owes: share capital plus reserves.
Source for the coverage definition: RBI press release on private corporate business sector, Q1 2026-27, 27 Aug 2026.
Trainer notes
The first three are about borrowing and its cost; the current ratio is about the next twelve months. The quick ratio, also called the acid-test ratio, is the current ratio with inventory left out of current assets, because stock may not sell quickly. RBI defines interest coverage as earnings before interest and tax divided by interest expenses.
Same profit, different debt
TWO COMPANIES
Each earns ₹30 crore a year before interest and tax. Both borrow at 10% a year.
A: debt ₹50 crore, net worth ₹100 crore. B: debt ₹200 crore, net worth ₹50 crore.
- Debt-equity: A = 50 ÷ 100 = 0.5. B = 200 ÷ 50 = 4.0. B has borrowed ₹4 for every ₹1 of its owners' money.
- Interest: A pays ₹5 crore, B pays ₹20 crore. Coverage: A = 30 ÷ 5 = 6.0 times. B = 30 ÷ 20 = 1.5 times.
- Profit before interest falls by a third, to ₹20 crore. A: 20 ÷ 5 = 4.0 times. B: 20 ÷ 20 = 1.0 time.
- At 1.0, all of B's operating profit goes on interest. RBI treats 1 as the minimum for a company to be viable.
Result: Borrowing makes a fall in profit bite harder. Coverage shows the room left.
Illustration with two invented companies and assumed figures. Not a view on any company.
Trainer notes
The same logic works in reverse: when profit rises, B's owners gain more per rupee of their own money, because the interest bill stays fixed. That is why companies borrow. The ratio does not say whether B's borrowing is wise; it shows how sensitive B is to a bad year.
What to check inside each ratio
| Ratio | Formula | Check this |
|---|---|---|
| Debt-equity | Total borrowings ÷ net worth | Which debt is counted: short-term loans and lease liabilities as well as long-term loans? |
| Interest coverage | Profit before interest and tax ÷ interest | A one-off gain in the year inflates the profit and flatters the ratio. |
| Debt service cover | Cash available for lenders ÷ (interest + principal due) | Large repayments due this year can make it low even when coverage looks comfortable. |
| Current ratio | Current assets ÷ current liabilities | Inventory and money owed by customers may not turn into cash on time. |
| Quick ratio | (Current assets − inventory) ÷ current liabilities | A stricter test of the next twelve months, for businesses that hold a lot of stock. |
Source for the coverage formula: RBI press release, 27 Aug 2026. Other formulas are the common textbook forms; companies state their own in their results.
Trainer notes
Formulas differ in detail between companies and data providers. When a company with listed debt reports these ratios, the note to its results says how each was worked out. Read that note before comparing two companies.
The household versions
EMI-to-income ratio
All monthly loan instalments (EMIs) ÷ monthly take-home pay. It shows how much of each month's income is already committed to lenders before anything else is spent.
Emergency ratio
Money that can be withdrawn within days ÷ essential monthly spending, EMIs included. The answer is in months: how long the household could keep paying if income stopped.
Take-away: Neither has one right level. It depends on how steady the income is and on other commitments.
Trainer notes
The emergency ratio is sometimes called a liquidity ratio. It is the household cousin of the company current ratio, not the same thing. We explain these ratios; we do not tell a client what theirs ought to be. Lenders apply their own credit policies when they decide how much to lend.
A household's two numbers
ONE HOUSEHOLD
Take-home pay: ₹80,000 a month.
EMIs: home loan ₹22,000, two-wheeler ₹3,000, personal loan ₹7,000.
Savings that can be withdrawn within days: ₹2,40,000.
- Total EMIs: 22,000 + 3,000 + 7,000 = ₹32,000 a month.
- EMI-to-income ratio: 32,000 ÷ 80,000 = 0.40. Forty per cent of take-home pay goes to lenders.
- Essential spending: EMIs ₹32,000 plus food, power and school fees ₹28,000 = ₹60,000 a month.
- Emergency ratio: 2,40,000 ÷ 60,000 = 4. The savings would cover four months if income stopped.
Result: One number shows how much income is committed; the other shows how long savings would last.
Illustration with an invented household and assumed figures.
Trainer notes
If income stops, EMIs do not, which is why they are counted in essential spending. A household with a steady salary and one with irregular income can read the same numbers very differently. Keep the conversation on what the numbers show.
Where things stand
Listed non-government non-financial companies, April to June 2026, as compiled by RBI.
- MANUFACTURING
- 10.2Interest coverage in April-June 2026: profit before interest and tax was 10.2 times interest.
- NON-IT SERVICES
- 2.6Interest coverage in the same quarter, which RBI says increased.
- COMPANIES COVERED
- 3,247Listed non-government non-financial companies whose quarterly results RBI used.
Source: RBI, Performance of Private Corporate Business Sector during Q1:2026-27, Press Release 2026-2027/974, 27 Aug 2026.
Trainer notes
RBI says only that interest coverage for IT companies stayed at an elevated level; the release gives no figure for it. These are aggregates for whole sectors. A sector figure says nothing about any one company in it. RBI also notes that the companies included differ by quarter, depending on when results are declared.
If you learnt this from older material
Older beliefs
- A debt-equity of 1:1 means little debt.
- A set share of income for EMIs is 'alright' for all.
- The liquidity ratio is the acid-test ratio.
- Debt ratios must be worked out from annual reports.
What holds now
- 1:1 means as much borrowed as owners have in. High or not depends on the business.
- No single level suits every household. It depends on income and commitments.
- The acid-test ratio is a company measure; the household one counts months.
- Companies with listed debentures report debt-equity and other ratios with results.
Source: SEBI (Listing Obligations and Disclosure Requirements) Regulations, 2015, regulation 52(4), as amended up to 22 Jan 2026.
Trainer notes
Regulation 52(4) applies to entities with listed non-convertible securities, such as listed debentures. Their quarterly and annual results must carry debt-equity, debt service coverage, interest service coverage and current ratios, among others. The two coverage ratios do not apply to banks or NBFCs. Companies with only listed shares follow other rules.
Four things people get wrong
Misconception'Any debt is a bad sign.'
What is trueBorrowing can pay for assets that earn more than the interest. The question is whether income covers the payments in bad years too.
Misconception'Low debt-equity means low risk.'
What is trueA company with little debt can still have a weak business, or bills due this year that it cannot pay.
Misconception'Interest is covered, so the debt is fine.'
What is truePrincipal falling due must also be repaid or refinanced. Debt service cover counts both.
Misconception'You can compare any two companies.'
What is trueCompare within an industry. In April-June 2026 RBI put coverage at 10.2 for manufacturing and 2.6 for non-IT services.
Trainer notes
On the third point: a company can pay its interest comfortably and still struggle if a large loan falls due in a year when lenders are cautious. On the fourth: capital-heavy businesses usually borrow more than light ones, so a ratio means most against the same industry or the company's own past.
Four questions to ask of any debt ratio
Which debt is counted?
Long-term loans only, or short-term borrowings and leases as well?
Which accounts and when?
Standalone or consolidated, and for which period. A quarter and a full year can give different answers.
Compared with what?
Others in the same industry, or the same company's own history.
What if income falls?
Rework the coverage with lower profit, or the household ratio with lower pay. How much room is left?
Take-away: We explain these ratios. We do not use them to tell a client which company or fund to buy.
Trainer notes
This is the slide to rehearse. The same four questions work for a company's results and for a client's own budget. For lenders such as banks, borrowing is the raw material of the business, so their debt-equity is not read the same way; do not compare a bank with a manufacturer.
Check yourself
Question 1: A company has borrowings of ₹300 crore and a net worth of ₹200 crore. What is its debt-equity ratio?
Answer: 300 ÷ 200 = 1.5. It has borrowed ₹1.50 for every ₹1 of its owners' money.Question 2: Profit before interest and tax is ₹48 crore and interest is ₹12 crore. What is the interest coverage, and what would a coverage of 1.0 mean?
Answer: 48 ÷ 12 = 4.0 times. At 1.0, all of the operating profit would go on interest, leaving nothing for tax or the owners.Question 3: Take-home pay ₹1,20,000 a month; EMIs ₹30,000; savings available within days ₹3,00,000; essential spending with EMIs ₹75,000 (assumed). Work out both ratios.
Answer: EMI-to-income ratio: 30,000 ÷ 1,20,000 = 25%. Emergency ratio: 3,00,000 ÷ 75,000 = 4 months. We explain what the numbers show; we do not say what they should be.
Trainer notes
If time allows, rework question 2 with profit down by half: 24 ÷ 12 = 2.0 times.
Sources and disclaimer
Sources for the figures in this explainer
- Interest coverage defined as profit before interest and tax ÷ interest, with 1 as the minimum for viability: RBI Press Release 2026-2027/974, 27 Aug 2026.
- Coverage of 10.2 (manufacturing) and 2.6 (non-IT services), 3,247 companies: RBI, Performance of Private Corporate Business Sector during Q1:2026-27, 27 Aug 2026.
- Ratios reported with results by entities with listed non-convertible securities: SEBI Listing Obligations and Disclosure Requirements Regulations, 2015, reg. 52(4), amended to 22 Jan 2026.
- Companies A and B, the household and all quiz figures are invented for illustration. They do not refer to any real company or person.
This material is for training and investor education only. It is not investment, tax or legal advice and is not a recommendation to buy, sell or hold any security or scheme. Examples use assumed figures unless a source and date are shown. Mutual fund investments are subject to market risks; read all scheme related documents carefully. Trustner Asset Services Pvt. Ltd. is an AMFI-registered Mutual Fund Distributor (ARN-286886).