**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.__$$Debt-Equity\quad Ratio=\frac { Total\quad Liabilities }{ Total\quad Equity}$$

**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.

**Where,**

- 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 favourable 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 fulfil 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**