Debt Equity ratio express the relationship between external equities and external equities I.e. owners' capital and borrowed capital. It shares favourable or non favourable capital structure of the company. It shows long term capital structure. It reveals high margin of safety to creditors and makes us understand the dependence on long term debts. Standard debt equity ratio is 2:1, which means debts should be double the shareholders funds.
Formula
Debt equity Ratio=Debt/Equity
0r
Long Term Debts/Shareholders Fund
or
Long Term Debts/(Shareholders' Funds + Long Term Debts)
Components:
1) Debts include all liabilities including short term & long term I.e. mortgage loan and debentures.
2) Shareholders’ funds consist of preference share capital, Equity share capital, Capital and Revenue Reserves, Surplus, etc..
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