Debt Equity Ratio

The debt-to-equity ratio is a financial ratio that measures the amount of a company's debt relative to its equity. It is calculated by dividing the company's total debt by its total equity.


Debt / Equity, where

Debt - It covers all long term or non-current liabilities of the company

Equity - It covers shareholders' funds i.e. share capital + Reserves and Surplus

How to Calculate

Debt covers all the non-current liabilities of the business. Its sub heads are as follows :

S NoSub HeadItemsBrief Explanation
1Long term borrowingsDebentures
Term Loans from a) Banks b) Other Parties
3Public Deposits
Other Loans and Advances
2Deferred Tax Liabilities (Net)Income Tax on (Accounting Income - Taxable Income)
3Other Long term Liabilities Any long-term liability other than long term borrowings
Trade PayablesSundry Creditors and Bills Payable
OthersPremium on redemption of debentures if debentures are long term
Premium on redemption of preference shares if preferences shares are long term
Advances from Customers - Long term
4Long Term ProvisionsProvision for Employee BenefitsProvision for Gratuity, Leave Encashment, Provident Fund, etc.
OthersProvision for warranty claims

Equity Means the Shareholders funds.Its sub heads are as follows :

S NoSub HeadItemsBrief Explanation
1Share Capital(Equity + Preference) and (Cash + Non Cash)Discussed in details in Company Accounts Chapter
Reserves and SurplusAmount set aside out of profits. For each item show Opening Balance, Additions/Deductions and Closing Balance+G8
Capital ReserveReserve created out of Capital Profits
Capital Redemption ReserveReserve created when company purchases its own shares out of free reserves
Securities Premium ReservesExcess of Issues price over Face Value
Debenture Redemption ReserveReserve created for the purpose of redemption of debentures
Revaluation ReserveReserve created due to upward revision of assets value
Share Options Outstanding AmountDifference between Market Value and Issue price of shares issued to employees
Other Reserves
- Workmen Compensation Reserve
- Investment Fluctuation Reserve
- Subsidy Reserve
- General Reserve
SurplusBalance in Statement of Profit & Loss A/c i.e. Accumulated profits not appropriated or distributed as dividends


The debt-to-equity ratio is used to evaluate a company's financial leverage, or the extent to which the company is using debt to finance its operations and growth. A high debt-to-equity ratio may indicate that a company has high levels of debt relative to its equity, which could be a sign of financial risk. On the other hand, a low debt-to-equity ratio may indicate that a company has low levels of debt relative to its equity, which could be a sign of financial stability.

A low debt equity ratio is always good for business. The higher the debt equity ratio it shows that the company is more leveraged and runs a higher risk when the business cycle turns adverse.

The lenders will be reluctant to give loans at favorable terms to a company which has a high debt equity ratio

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