Page 125 - DMGT403_ACCOUNTING_FOR_MANAGERS

Accounting for Managers

Notes
Figure 6.4

Under the capital structure ratios, the composition of the capital structure is analysed only in the
angle of long term solvency of the firm.

Leverage Ratios

Debt-equity Ratio

It is the ratio expresses the relationship between the ownership funds and the outsiders' funds.
It is more specifically highlighted that an expression of relationship in between the debt and
shareholders' funds. The debt-equity ratio can be obviously understood into two different forms:
1. Long-term debt-equity ratio
2. Total debt-equity ratio
Let us understand each of them one by one.

Long-term Debt-equity Ratio

It is a ratio expressing the relationship in between the outsiders' contribution through debt
financial resource and shareholders’ contribution through equity share capital, preference share
capital and past accumulated profits. It reveals the cover or cushion enjoyed by the firm due to
the owners' contribution over the outsiders' contribution.

Debt (Long-term Debt = Debentures/Term Loans)
Debt-equity Ratio =
Net Worth/Equity (Shareholders' Fund)

Example: The long-term debt of company ABC is 3 crores and the networth of the company
is 5 crores. What is the long-term debt-equity ratio of ABC?
Solution:
Debt
Long-term debt-equity Ratio = = 3/5 = .6
Net Worth

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