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Debt-Equty Ratio

Surya Jain (Student) (944 Points)

21 September 2009

What is the importance of Debt-Equity Ratio for a Company?

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CA LOVELY ARORA (C.A. B.Com (H) Graduate) (2151 Points)
Replied 21 September 2009

There are too many perspectives in this regard.

Debt-Equity ratio explains the financial strength of the organisation, as given below :-

If Debt-Equity ratio is too high, means co. is employed with too much debt that is to be paid on maturity and also financial risk is too high as co. is charged with fixed burden in the form of INTEREST ON DEBENTURES, LOANS etc.

If it is too low, means equity is too high, the req. of investors would be too high in context of dividend to be paid and also capital gains on sale of share of co.

So, Debt-Equity reatio needs to be balanced. The ideal ratio for this is 1:1.

Surya Jain (Student) (944 Points)
Replied 21 September 2009

Thanks a lot! Sir, It is quite satisfactory & informative!

CA LOVELY ARORA (C.A. B.Com (H) Graduate) (2151 Points)
Replied 22 September 2009

welcome...... always.

Suresh Goel (servuce) (335 Points)
Replied 13 April 2010

sir, I think this calculation good at the time of new company. when a company starts to earn profits and accumulate huge reserve, whether this ratio has any significance