Debt Equity Ratio: The debt-equity ratio is an indication of the relationship between the contribution of the creditors and shareholders /owners in the capital employed in business. It's one of important financial liquidity ratios among all that are used to assess the performance of a company.If you like this article then please like us on Facebook so that you can get our updates in the future, and subscribe to our mailing list ” freely “
- AS 12 Accounting for Government Grants
- Accounting Standard 10
- Accounting Standard 16
- Accounting Standard 15
Debt - Equity ratio Formula
DER = Total amount of Debt/Total equity funds
It means for every 1.5 rupees of lenders there is only 1 rupee amount of equity funds to compensate the creditors.DER = 15/10. =1.5 times or 150%
Importance of Debt - Equity ratio
- When the Debt Equity ratio of a company is very high then it's an indication that the company's operations are going in vain in generating enough funds to meet the fixed financial obligations ie debt.
- When the Debt Equity ratio of a company is too low that means the company is failed in getting the benefits from financial leverage.
- When comparing the Debt Equity-ratio of two or more companies ,we should ensure that they are belonging to similar industry because comparison of different companies of different industries can't depict a more accurate results. For instance Labour intensive industries requires less amount of capital when compared to other. So obviously it has a greater impact on debt equity-ratio of the companies belonging to such industry.