renuka (Student) (480 Points)
27 October 2013
Deepak Gupta
(CA Student)
(15922 Points)
Replied 27 October 2013
Extract from FM Book by Khan & Jain
.
Deepak Gupta
(CA Student)
(15922 Points)
Replied 28 October 2013
I think confusion is arising because in debt to equity ratio sometimes long term debt is used instead of total liabilities as a numerator.
.
But generally, current liabilities should be included because
.
1) Current liabilities also form the part of debt and one of a factor determining the risk taking appetite of a firm.
.
2) Major component of current liability is short term bank loan, which also carries interest cost with it.
.
3) Short term creditors restrict the management activities as they have to be paid on time.
.
Hence without including this, we may not be able to assess the correct solvency position.
renuka
(Student)
(480 Points)
Replied 28 October 2013
CAclubindia
