**Debt-Equity Ratio**is a

**type of Solvency Ratio that determines the relative contribution of creditors and the shareholders in the company’s funds**.

**It is a measure to which a company depends upon outsiders for its operations.**

__Creditors' contribution is termed as Debt whereas Shareholder’s contribution is termed as Equity.__Debt-Equity Ratio = Total Liabilities / Total Equity

**Where,**

**Total Liabilities = Long Term Liabilities + Current or Short-Term Liabilities;**hence, total liabilities include all debts/liability payable within a year and payable in the long-term.- And
**Total Equity = Total Assets - Total Liability;**total assets and total liability include current as well as non-current assets and liabilities, respectively. It also includes Reserves and Surplus of the company.

## Significance and Interpretation

**Debt - Equity Ratio = 1:**This implies that the total equity is just enough to pay all the debts, the company is not in a debt position wherein all equities are not enough to clear the debts**Debt – Equity Ratio < 1:**This implies that the company is in a safe position, total equities are more than the total debt which turns to be favorable for the company in times when the interest rates rise.**Debt – Equity Ratio > 1:**This implies that the total debts of a company exceed its total equity and the company is in debt-ridden position, the company faces lots of issues in times when the interest rates rise.**The ideal Debt-Equity Ratio <1,**which indicates that the company has enough equities to fulfill the debts (both current as well as non-current). Debt – Equity Ratio is acceptable up to the value 1 wherein total liabilities equals the total equities. However, it must be noted that this limit may shift depending upon the regulatory reforms and/or type of business.

__A low Debt-Equity Ratio is beneficial for lenders to the company, wherein a high Debt-Equity Ratio is beneficial to the company for trading in Equities.__## Examples

**Example 1: M/S ABC Ltd. reported short term debts worth ₹50 Crores, long term debts worth ₹150 Crores, and total equity as ₹300 Crores, find the debt-equity ratio of M/S ABC Ltd.**

**Solution:**Total Liability = Short Term Liability + Long Term Liability = ₹200 Crores- Total Equity = ₹300 Crores
- Debt-Equity Ratio = Total Liability / Total Equity = 200/300 = 2/3
- Hence, Debt–Equity Ratio = 2/3 or 0.6667

**Example 2: The following information is available about M/S XYZ Ltd, find the debt-equity ratio of the firm.**

Sr. No | Particulars | Amount (in ₹ Cr) |
---|---|---|

1 | Current Liability | 500.00 |

2 | Non-Current liability | 100.00 |

3 | Current Asset | 150.00 |

4 | Non- Current Asset | 800.00 |

5 | Reserves and Surplus | 50.00 |

**Solution:**- Total Debt = Current Liability + Non-Current Liability = 500 +100 = ₹600 Crores
- Total Equity = Total Assets – Total Liability = (Current Asset + Non-Current Asset + Reserves and Surplus) – (Current Liability + Non-Current Liability)
- Hence, Total Equity = 1000 – 600 = 400 Crores
- Debt–Equity Ratio = Total Debt / Total Equity = 600/400 = 3/2
**Hence, Debt–Equity Ratio = 3/2 or 1.5**