DE (Debt Equity Ratio)
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DEBT–EQUITY RATIO — Banking Promotion Study Notes
1. Debt–Equity Ratio kya hota hai?
Debt–Equity Ratio business ke borrowed funds aur owners’ funds ke beech relationship batata hai.
Simple meaning: Owners ke har ₹1 ke against business mein kitna borrowed money laga hai?
Formula:
Debt–Equity Ratio = Defined Debt ÷ Defined Equity
Suppose debt ₹60 lakh aur equity ₹40 lakh hai:
D/E = 60 ÷ 40 = 1.50:1
Matlab, owners ke har ₹1 ke against ₹1.50 debt hai.
| Ratio | Meaning |
|---|---|
| 0.50:1 | ₹1 equity ke against ₹0.50 debt |
| 1.00:1 | Debt aur equity equal |
| 2.00:1 | ₹1 equity ke against ₹2 debt |
Important: D/E of 2:1 ka matlab business ki total funding ka 200% debt hona nahi hai.
2. Pehle formula ki definition samjho
Debt–Equity Ratio ki calculation mein different conventions use ho sakte hain.
| Measure | Numerator | Denominator |
|---|---|---|
| Long-term Debt–Equity | Defined long-term debt | Shareholders’ funds |
| Total Debt–Equity | Defined long-term + short-term debt | Defined shareholders’ equity |
| Debt/TNW | Defined debt | Tangible Net Worth |
| TOL/TNW | Total Outside Liabilities | Tangible Net Worth |
Exam rule: Question mein jo definition di hai, usi ko follow karo.
Short-term bank borrowing total-debt calculation mein include ho sakti hai, lekin long-term-debt-only calculation mein exclude ho sakti hai.
3. Debt mein kya include hota hai?
Specified definition ke according, debt mein ye items aa sakte hain:
- Term loans.
- Debentures.
- Short-term bank borrowings.
- Cash credit/working-capital borrowings.
- Unsecured loans.
- Current maturities of term loans.
Current maturities ka matlab term loan ka woh principal portion jo relevant current period mein repay hona hai.
Double-counting trap: Agar term-loan figure mein current maturities already included hain, unhe dobara add mat karo.
Trade creditors: Ordinary trade creditors automatically interest-bearing debt nahi hote. Borrowing-only D/E mein generally exclude honge; broader outside-liabilities measure mein include honge.
4. Equity kya hoti hai?
Simple teaching formula:
Equity = Owners’ Capital + Eligible Reserves/Retained Earnings − Accumulated Losses
Actual calculation mein balance-sheet classification aur prescribed methodology follow karo.
Example:
| Particulars | ₹ lakh |
|---|---|
| Share capital | 30 |
| Eligible reserves, already net of losses | 20 |
| Equity | 50 |
Agar reserves already losses adjust karne ke baad diye hain, losses ko dobara deduct mat karo.
Preference shares: Treatment instrument ke terms, accounting classification aur applicable method par depend karega.
Promoter’s unsecured loan: Sirf promoter se paisa aane par woh automatically equity nahi ban jata. Quasi-equity treatment ke liye applicable policy aur conditions—jaise subordination aur business mein retention—check karni hongi.
5. Equity aur Tangible Net Worth mein difference
Book equity aur Tangible Net Worth—TNW interchangeable nahi hain.
TNW calculate karte waqt prescribed method ke according intangible assets, revaluation reserves aur other specified adjustments deduct kiye ja sakte hain.
Example:
Book equity ₹50 lakh hai. Ismein ₹5 lakh revaluation reserve included hai. Goodwill ₹5 lakh hai.
Assume specified TNW method mein dono deduct karne hain:
TNW = 50 − 5 − 5 = ₹40 lakh
Agar debt ₹80 lakh hai:
- Debt/Book Equity = 80 ÷ 50 = 1.60:1
- Debt/TNW = 80 ÷ 40 = 2.00:1
Learning: Denominator change hone se ratio aur interpretation dono change ho sakte hain.
6. Solved Example — Basic D/E
| Particulars | ₹ lakh |
|---|---|
| Share capital | 30 |
| Eligible reserves, already net of losses | 20 |
| Defined long-term debt, including current maturities | 75 |
Equity = 30 + 20 = ₹50 lakh
Long-term D/E = 75 ÷ 50 = 1.50:1
Owners ke har ₹1 ke against ₹1.50 defined long-term debt hai.
7. Same balance sheet, different answers
Assume:
| Particulars | ₹ lakh |
|---|---|
| Non-current portion of term loan | 50 |
| Current maturities of term loan | 10 |
| Short-term bank borrowing | 20 |
| Trade creditors | 15 |
| Book equity | 40 |
A. Total-debt D/E — all borrowings included
Debt = 50 + 10 + 20 = ₹80 lakh
D/E = 80 ÷ 40 = 2.00:1
B. Term-debt D/E — current maturities included
Term debt = 50 + 10 = ₹60 lakh
D/E = 60 ÷ 40 = 1.50:1
C. Outside liabilities/Book equity
Outside liabilities = 50 + 10 + 20 + 15 = ₹95 lakh
Ratio = 95 ÷ 40 = 2.375:1
Last calculation ko TOL/TNW tabhi kahenge jab ₹40 lakh denominator TNW establish kiya gaya ho.
8. Ratio se debt calculate karna
Given:
- D/E = 1.8:1
- Defined equity = ₹25 lakh
Debt = D/E × Equity
Debt = 1.8 × 25 = ₹45 lakh
Debt + Equity = 45 + 25 = ₹70 lakh
Yeh total funding tabhi hai jab question mein debt aur equity hi sole funding sources hon.
9. Project contribution ka calculation
Agar project sirf debt aur equity se funded hai:
Debt Share = Debt ÷ (Debt + Equity)
Equity Share = Equity ÷ (Debt + Equity)
D/E 2:1 hone par:
- Total parts = 2 + 1 = 3
- Debt share = 2/3 = 66.67%
- Equity share = 1/3 = 33.33%
Example:
Project cost = ₹90 lakh
Debt–Equity mix = 2:1
Debt = 90 × 2/3 = ₹60 lakh
Equity contribution = 90 × 1/3 = ₹30 lakh
Check: 60 ÷ 30 = 2:1
Important: Project ka funding ratio aur borrower ka overall D/E alag ho sakta hai. Post-project entity ratio nikalte waqt existing debt aur equity bhi consider karo.
10. Maximum debt under an assumed ratio cap
Yeh calculation illustration hai, actual bank policy nahi.
Assume permitted D/E cap 2:1, eligible equity ₹40 lakh, existing defined debt ₹60 lakh.
Maximum total debt = 2 × 40 = ₹80 lakh
Additional ratio-based headroom = 80 − 60 = ₹20 lakh
₹20 lakh headroom ka matlab automatic loan eligibility nahi hai. Actual sanction mein funding need, repayment capacity aur applicable conditions bhi assess hongi.
11. Target ratio ke liye fresh equity
Debt ₹90 lakh, existing equity ₹30 lakh aur target D/E 2:1 hai. Debt unchanged rahega.
Required equity = Debt ÷ Target ratio
Required equity = 90 ÷ 2 = ₹45 lakh
Fresh equity required = 45 − 30 = ₹15 lakh
12. Transactions ka D/E par effect
Starting position:
Debt ₹60 lakh | Equity ₹40 lakh | D/E 1.50:1
Har transaction independently consider karo. Taxes, costs aur other changes ignore karo.
| Transaction | Calculation | New D/E |
|---|---|---|
| Fresh equity ₹10 lakh | 60 ÷ 50 | 1.20 |
| Additional debt ₹20 lakh | 80 ÷ 40 | 2.00 |
| Existing cash se debt ₹10 lakh repay | 50 ÷ 40 | 1.25 |
| Additional profit ₹10 lakh retain | 60 ÷ 50 | 1.20 |
| Loss ₹10 lakh recognise | 60 ÷ 30 | 2.00 |
| Debt ₹10 lakh validly equity mein convert | 50 ÷ 50 | 1.00 |
| Debtors se ₹10 lakh full collection | 60 ÷ 40 | 1.50 |
Interpretation:
Debt repay karne se D/E improve ho sakta hai, lekin cash use hone se liquidity weaken bhi ho sakti hai.
Retained profit equity improve karta hai, par profit ka paisa stock ya debtors mein blocked ho sakta hai.
13. Zero aur negative equity
Equity zero ho:
Debt ₹20 lakh ÷ Equity zero = Undefined
Division by zero valid nahi hai.
Equity negative ho:
Debt ₹20 lakh, equity −₹5 lakh.
Arithmetic result = −4
Isko favourable ya low-risk D/E nahi samjhenge. Negative equity capital erosion indicate karti hai aur separate analysis chahiye.
14. D/E aur DSCR mein difference
| Point | Debt–Equity Ratio | DSCR |
|---|---|---|
| Main focus | Capital structure/leverage | Repayment capacity |
| Comparison | Defined debt vs defined equity | Available amount vs debt service due |
| Main question | Owners’ funds ke against debt kitna hai? | Interest aur principal payments cover ho rahe hain? |
| Timing | Balance-sheet position | Relevant period’s earnings/cash-flow cover |
Achchha D/E timely repayment ki guarantee nahi hai. DSCR, cash flows aur liquidity bhi examine karo.
15. Common exam mistakes
- Debt ki definition check kiye bina formula apply karna.
- Trade creditors ko har D/E calculation mein add kar dena.
- Current maturities double-count karna.
- Promoter loan ko automatically equity maan lena.
- Book equity aur TNW ko same samajhna.
- Losses ko twice deduct karna.
- Negative D/E ko favourable samajhna.
- Project funding ratio ko overall business ratio maan lena.
- Ratio-based headroom ko automatic sanction eligibility samajhna.
16. Practice MCQs
Q1. Defined debt ₹75 lakh aur equity ₹50 lakh hai. D/E?
A. 0.67
B. 1.00
C. 1.50
D. 2.50
Q2. ₹120 lakh project sirf debt aur equity se 2:1 mein funded hai. Required equity?
A. ₹20 lakh
B. ₹40 lakh
C. ₹60 lakh
D. ₹80 lakh
Q3. Debt ₹60 lakh, equity ₹40 lakh. Additional equity ₹20 lakh introduce hoti hai. Debt unchanged hai. New D/E?
A. 0.50
B. 1.00
C. 1.50
D. 2.00
Q4. Borrowing-only total-debt definition mein normally kaunsa item exclude hoga?
A. Term loan
B. Short-term bank borrowing
C. Loan current maturity
D. Ordinary trade creditors
Q5. Book equity ₹60 lakh mein revaluation reserve ₹10 lakh included hai. Intangibles ₹5 lakh hain. Stated TNW method mein dono deduct karne hain; other adjustments nahi hain. TNW?
A. ₹45 lakh
B. ₹50 lakh
C. ₹55 lakh
D. ₹75 lakh
Q6. Debt ₹80 lakh, equity ₹40 lakh. ₹10 lakh loss recognise hota hai. Debt unchanged hai. New D/E?
A. 1.60
B. 2.00
C. 2.67
D. 3.00
Q7. Promoter ke unsecured loan ka treatment:
A. Always equity
B. Always all ratios se exclude
C. Specified methodology aur terms ke according
D. Automatically debt se deduct aur equity mein add
Q8. Periodic interest aur principal servicing capacity assess karne ke liye kaunsa ratio relevant hai?
A. D/E
B. DSCR
C. Current Ratio
D. Inventory Turnover
Q9. Defined equity zero hone par D/E:
A. Zero
B. One
C. Automatically satisfactory
D. Undefined
Q10. Debt ₹90 lakh, equity ₹30 lakh. Debt unchanged rakhkar target D/E 2:1 achieve karne ke liye fresh equity?
A. ₹10 lakh
B. ₹15 lakh
C. ₹30 lakh
D. ₹45 lakh
17. Answers with explanations
| Question | Answer | Explanation |
|---|---|---|
| 1 | C | 75 ÷ 50 = 1.50:1 |
| 2 | B | 120 × 1/3 = ₹40 lakh |
| 3 | B | 60 ÷ (40 + 20) = 1:1 |
| 4 | D | Ordinary trade creditors borrowing-only definition mein excluded hain. |
| 5 | A | 60 − 10 − 5 = ₹45 lakh |
| 6 | C | 80 ÷ (40 − 10) = 2.67 |
| 7 | C | Applicable method aur instrument terms follow karne honge. |
| 8 | B | DSCR interest aur principal servicing cover assess karta hai. |
| 9 | D | Division by zero undefined hai. |
| 10 | B | Required equity 90/2 = 45; fresh equity = ₹15 lakh |
One-minute revision
D/E = Defined Debt ÷ Defined Equity
Debt = Ratio × Equity
Required Equity = Debt ÷ Target Ratio
Only debt-and-equity funding mein: Equity Share = E ÷ (D + E)
Pehle definition samjho → phir calculate karo → phir interpret karo.
Put it into practice with a timed mock test.
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