Debt to Equity Ratio: How Much of a Company Is Funded by Borrowing?
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5 min read
Two companies each own Rp600 billion of assets. Each earns Rp100 billion from its business this year. On the surface, they look the same.
But one built those assets mostly with its own money. The other borrowed most of it. When a bad year comes, they will not feel the same.
The number that shows this gap is the debt to equity ratio. This post explains it in plain words, works through an example, and shows why banks break the usual rules. It does not say any stock is a good or bad buy.
A company pays for what it owns in two ways. It uses its owners' money, called equity. Or it borrows, which creates debt.
The debt to equity ratio (D/E) compares the two. How many rupiah of debt sit next to each rupiah of owners' money?
If a company has Rp200 billion of debt and Rp400 billion of equity, D/E is 0.5. It borrows 50 sen for every rupiah the owners put in.
One catch. Sources do not all use the same top number. Some use only interest-bearing loans and bonds. Others use all liabilities, which also counts things like unpaid bills (Strike, seen through search on 28 October 2026). Always check which one a source uses before comparing.
We will use two invented companies. They are not real issuers. All numbers are NetWort arithmetic, in rupiah billions. Both pay 9% interest on their debt.
| Line | PT Contoh Hemat | PT Contoh Pinjam |
|---|---|---|
| Total assets | 600 | 600 |
| Debt | 100 | 400 |
| Equity | 500 | 200 |
| Debt to equity ratio | 0.2 | 2.0 |
| Interest expense (9%) | 9 | 36 |
Same assets. Very different funding. PT Contoh Pinjam borrows two rupiah for every rupiah of its owners.
Say each company earns Rp100 billion of operating profit. After interest, here is what is left. To keep it simple, we ignore tax.
| Line | PT Contoh Hemat | PT Contoh Pinjam |
|---|---|---|
| Operating profit | 100 | 100 |
| Interest | −9 | −36 |
| Profit before tax | 91 | 64 |
| Return on equity (profit ÷ equity) | 18.2% | 32.0% |
PT Contoh Pinjam earns less in total. But the owners put in only Rp200 billion, so each rupiah of theirs works harder. Their return on equity is 32%, against 18.2%.
This is why companies borrow. Debt can lift the return on the owners' money, as long as the business earns more than the debt costs.
Now say a slow year cuts operating profit to Rp30 billion for both.
| Line | PT Contoh Hemat | PT Contoh Pinjam |
|---|---|---|
| Operating profit | 30 | 30 |
| Interest | −9 | −36 |
| Profit before tax | 21 | −6 |
| Return on equity | 4.2% | −3.0% |
The lender does not take a break in a slow year. PT Contoh Pinjam still owes Rp36 billion, more than it earned. It now has a loss.
That is the real risk behind a high D/E. Debt makes good years better and bad years worse. For a deeper look at the interest side, read our post on the interest coverage ratio. In the bad year, PT Contoh Pinjam covers its interest only 0.83 times (30 ÷ 36).
There is no official line. These are common rules of thumb from finance guides, not laws:
These come from general guides, and they stress that the right level depends on the industry (Strike, Macrotrends, via search on 28 October 2026). A business with steady income can carry more debt than one whose sales swing wildly.
Do not use the usual D/E yardstick on a bank. A bank's main raw material is other people's money. Your savings deposit is a liability for the bank, so it counts as debt.
That makes bank D/E look huge. One guide notes that bank ratios often run above 5 and sometimes above 10 (Strike, via search). That is normal for the business, not a warning.
Banks are also judged by capital rules set by regulators. We did not find the Indonesian thresholds in the sources we could open, so check OJK for those. The takeaway is simple. Compare a bank only with other banks, and use bank-specific measures.
D/E is a quick check, not a verdict. Keep these limits in mind:
Open the Explore screener and pick two IDX companies from the same sector. Open each latest report, work out the debt to equity ratio the same way for both, and compare. Then ask which one would struggle more in a slow year.