How to read a company's Debt-to-Equity Ratio with real PSX examples

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May 23 (edited) • 📚 Learn

Debt-to-Equity ratio tells you one thing, whose money is running this business.

Every business is funded by two sources: money the owners put in (equity) and money borrowed from others (debt). D/E shows the proportion between the two.

D/E = Total Debt / Shareholders Equity

A D/E of 1.5 means for every Rs. 100 of owners' money, the company has borrowed Rs. 150. More than half the business is running on borrowed money.

But debt isn't always bad

If a company borrows at 12% and earns 25% on that capital, it's generating wealth from borrowed money. That's called leverage working in your favour.

The problem starts when earnings dip but interest payments don't. A highly leveraged company in a bad year can spiral fast: no slack, no cushion.

Reading the number

0 – 0.5 → Conservatively funded. Mostly owner capital. Stable but may grow slower.
0.5 – 1.5 → Balanced leverage. Healthy in most industries. Growth funded sensibly.
1.5+ → Heavily leveraged. Higher risk and reward. Context is everything.

Always compare within the same industry. A D/E of 3 is routine for a power plant. The same number for a textile company is a red flag.

PSX Examples:

OGDC: D/E ≈ 0.23 (effectively zero for years)

OGDC ran at zero debt from 2021 through 2024, four straight years of a completely clean balance sheet. No borrowing, no interest burden, operations funded entirely by its own capital.

The small uptick to 0.23 in 2025 is worth watching but nowhere near concerning. At this level it's barely leverage, more likely project financing for a specific initiative rather than any structural shift in how the company funds itself.

This is what a cash-generative, state-backed oil and gas giant looks like on a balance sheet. The risk here was never debt, it's always been oil prices and circular debt from the government side. The D/E tells you OGDC doesn't add financial risk on top of that. That's the right call.

LUCK: D/E ≈ 0.54

Lucky Cement peaked at a D/E of 1.12 in 2022, that was deliberate. They were mid-expansion: new plants, Lucky Electric, Lucky Motor all scaling simultaneously. They borrowed to build.

Since then, four consecutive years of declining leverage. 1.12 → 0.93 → 0.75 → 0.54. That's a company generating strong cash flows and systematically paying down debt. Not being forced to, choosing to.

For a conglomerate of this scale and ambition, 0.54 is conservative. Borrowed to build, now cleaning it up. That's exactly how you want it to go.

HUBC: D/E ≈ 0.38 (down from 1.14)

HUBCO started with a D/E above 1.14, expected for a company whose entire business model is building power plants that cost billions before they earn a single rupee. You borrow heavy, you generate stable long-term cash flows, you pay it down. That's the infrastructure playbook.

And they've executed it cleanly. 1.14 → 0.71 → 0.38. By 2025 they're at 0.38, remarkably low for a power generation company of this size. The debt burden that once defined their balance sheet is nearly gone.

What makes this meaningful is the nature of their cash flows. Power purchase agreements mean predictable revenue for decades. That predictability is what makes high early leverage acceptable, and what makes the paydown this fast impressive.

The investor's takeaway:

D/E is not a pass/fail score. It's a question: can this company's cash flows comfortably cover its debt obligations, even in a rough year?

A low D/E with weak earnings can be more dangerous than a high D/E with rock-solid cash flows.

Always pair it with interest coverage ratio and earnings consistency before drawing conclusions.

Are you more comfortable owning a zero-debt company like OGDC, or a company like HUBCO that borrowed aggressively to build and is now paying it down and why? Tell us in the comments!

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How to read a company's Debt-to-Equity Ratio with real PSX examples