Debt-Equity Ratio: The debt-equity ratio is determined to ascertain the soundness of the long-term financial position of the company. It is also known as “External – Internal” equity ratio.

Advertisement

 

Total long-term debt

Debt – Equity Ratio = ——————————————

Shareholder’s funds

 

Significance: The ratio indicates the preparation of owners’ stake in the business. Excessive liabilities tend to cause insolvency. The ratio indicates the extent to which the firm depends upon outsiders for its existence. The ratio provides a margin of safety to the creditors. It tells the owners the extent to which they can gain the benefits or maintain control with a limited investment.

 

(c) Proprietary ratio : It is a variant of debt-equity ratio. It establishes relationship between the proprietor’s funds & the total tangible assets. It may be expressed as:

 

Shareholder’s funds

= ——————————–

Total tangible assets

 

Significance: This ratio focuses the attention on the general financial strength of the business enterprise. The ratio is of particular importance to the creditors who can find out the proportion of shareholders funds in the total assets employed in the business. A high proprietary ratio will indicate a relatively little danger to the creditor’s etc., in the event of forced reorganization or winding up of the company. A low proprietary ratio indicates greater risk to the creditors since in the event of losses a part of their money may be lost besides loss to the properties of the business. The higher the rate, the better it is. A ratio below 50 percent may be alarming for the creditors since they may have to lose heavily in the event of company’s liquidation on account of heavy losses.

 

Advertisement
The following two tabs change content below.
We, at BMS.co.in, believe in sharing knowledge and giving quality information to our BMS students. We are here to provide and update you with every details required by you BMSites! If you want to join us, please mail to [email protected]
7 Comments

Leave a reply

BMS.co.in is aimed at revolutionising Bachelors in Management Studies education, also known as BMS for students appearing for BMS exams across all states of India. We provide free study material, 100s of tutorials with worked examples, past papers, tips, tricks for BMS exams, we are creating a digital learning library.

Disclaimer: We are not affiliated with any university or government body in anyway.

©2020 BMS - Bachelor of Management Studies Community 

A Management Paradise Venture

Ask Us On WhatsApp
or

Log in with your credentials

or    

Forgot your details?

or

Create Account