Ratio analysis

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santosh (Querist)
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20 January 2013 Is the standard ratio of Debt equity is 2:1?
Why not 1:1 as it is better than 2:1?
and what is the logic behind this standard form of debt equity ratio?if we consider risk factor debt is good and if we consider cost factor equity is good.i always confused in this point.

Amol S Joglekar

Amol S Joglekar (Expert)
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20 January 2013 Ratio analysis as such is always regarded to be CRUDE indicators. 2:1 is the very very general indicators. Please go through the topic on "trading on equity" "financial leverage", the confusion will be over. In power sector, capital intensive projects, this ratio may be as high as 7:1

CA N RAJA

CA N RAJA (Expert)
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23 January 2013 Debt Equity of 2:1 means 67% of Debt and 33% of Equity.

This ratio will generally be insisted by Financiers to ensure satisfactory participation of borrowers through 33%.

In practice, banks are now ok with Overall Debt Equity of 3:1 and only for Project 2:1 are insisted.

1:1 is the ideal situation. But on tax savings angle 2:1 will be preferred.