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Explain Debt Equity Ratio. What are its components? What does it indicate?
Debt Equity Ratio is one of the ratios of solvency group. It indicates the stake of shareholders and creditors in the organization. It indicates the cushion available to the creditors on the liquidation of the organization. A high debit equity ratio indicates that the financial stake of the creditors is more than that of the owners. On the other hand, a low debt equity ratio means that the borrowing capacity of the organization is being underutilized.
Its components are External liabilities and Shareholder’s funds. External liabilities include long term liabilities (like debentures, term loans and deferred payment liabilities) and short term liabilities. Shareholders’ funds consist of share capital, reserves and surplus.
Formula to calculate Debt Equity Ratio = External Liabilities. Shareholder's funds
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