“Why isn’t this stock going up even though it has a low P/E and high ROE?”
Often, the answer is weak financial stability.
Strong profits mean little if a company cannot survive during tough times. That’s why investors should also check debt ratio and interest coverage ratio — two key indicators of financial health.
📊 What Is the Debt-to-Equity Ratio (D/E)?
Formula:
Debt-to-Equity Ratio (D/E) = Total Debt ÷ Shareholders’ Equity × 100
This shows how much debt a company is using compared to its equity.
👉 Example:
- Debt = $1 billion
- Equity = $500 million
- Debt-to-Equity Ratio (D/E) = 200%
Interpretation guide:
| Debt-to-Equity Ratio (D/E) | Meaning |
|---|---|
| ≤ 100% | Stable structure (equity ≥ debt) |
| 100–200% | Normal corporate level |
| ≥ 300% | Risky – company heavily leveraged |
📌 Note: Some industries (e.g., airlines, construction) naturally carry higher Debt-to-Equity Ratio (D/E).
💵 What Is the Interest Coverage Ratio?
Formula:
Interest Coverage Ratio = Operating Income ÷ Interest Expense
It tells you how many times a company can cover its annual interest payments with operating profit.
👉 Example:
- Operating Income = $100 million
- Interest Expense = $25 million
- Interest Coverage Ratio = 4×
Interpretation guide:
| Interest Coverage | Meaning |
|---|---|
| ≥ 5× | Very stable |
| 2–5× | Average |
| ≤ 1× | Danger – may not cover interest (possible losses) |
🧠 Why Look at Both Together?
| Situation | What It Means |
|---|---|
| Low Debt-to-Equity Ratio (D/E) + High coverage | Very safe structure |
| High Debt-to-Equity Ratio (D/E) + High coverage | Debt-heavy, but still manageable |
| High Debt-to-Equity Ratio (D/E) + Low coverage | 🚨 Major red flag – debt risk is high |
| Low Debt-to-Equity Ratio (D/E) + Low coverage | Not much debt, but weak profitability |
📌 Practical Tips for Investors
- Even if P/E and ROE look great, think twice if Debt-to-Equity Ratio (D/E) > 300%.
- If interest coverage < 1×, the company may struggle to pay lenders.
- Always cross-check with the cash flow statement for a full picture.
✅ Quick Summary
| Metric | Formula | Safe Level | What It Shows |
|---|---|---|---|
| Debt-to-Equity Ratio (D/E) | Debt ÷ Equity × 100 | ≤ 100% | Debt load vs equity |
| Interest Coverage | Operating Income ÷ Interest Expense | ≥ 1× | Ability to pay interest |
💬 Final Thoughts
Great companies are not just profitable — they are resilient.
When markets turn, those with strong financial health survive and even thrive.
By adding Debt-to-Equity Ratio (D/E) and Interest Coverage Ratio to your checklist — alongside P/E, ROE, and P/B — you’ll separate truly safe investments from fragile ones.
📝 Disclaimer
This article is intended for educational purposes only. It does not constitute financial, investment, or legal advice. All investment decisions involve risks, and readers should conduct their own research or consult with a licensed financial advisor.