Debt ratio = Total liabilities to outsiders/Total assets
2]
Assets | Fixed Asset | 15,00,000 |
Current Asset | 5,00,000 |
Liabilities | Accounts payable | 200000 |
Reserve And Surplus | 100000 | |
10% Debentures | 300000 | |
6% Preference Share Capital | 300000 | |
Equity Share Capital | 1100000 |
- Calculate Debt-Ratio
- Calculate Debt-equity Ratio
Solution :
- Debt ratio = Total liabilities to outsiders/Total assets
= (Debentures + trade creditors)/ (Fixed + current assets)
= (3,00,000 + 2,00,000) / (15,00,000 + 5,00,000)
= 5,00,000 / 20,00,000
= 1: 4
Interpretation: The ratio indicates that the firm has Rs.4 assets for every rupee of long-term liability. Hence the financial position is good.
- Debt –equity ratio = Outsiders’ funds/shareholders’ equity or
= (Debentures + Trade Creditors)
Eq Sh capital + Pref Sh cap + Reserves)
= (3,00,000 +2,00,000)
(11,00,000 + 3,00,000 +1,00,000)
= 5,00,000 / 15,00,000
= 1 : 3
Interpretation: the ratio indicates that the firm has Rs.3 equity for every rupee of long-term liability. Hence the financial position is good.
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