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Long Term Debt to Equity Ratio

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Rajat Kumar

Understanding debt equity ratio and what does long term debt to equity ratio indicates.

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www.sanasecurities.com Sana Securities Long Term Debt to Equity Ratio © Sana Securities| All Rights Reserved | www.sanasecurities.com
Long Term Debt to Equity Ratio q What does this ratio indicates? Long Term Debt to Equity Ratio indicates the extent to which a company relies on external debt financing to meet its capital requirements. Net Worth = Share Capital + Reserve and Surplus Remember: When calculating the Long Term Debt Equity Ratio on a consolidated basis, the denominator will be the sum of Net Worth + Minority Interest. For more on this see: Efficiency Analysis @ http://www.sanasecurities.com/return-equity-capital-employed-ratio
Balance Sheet - Tata Motors Limited (Consolidated)
q Long Term Debt to Equity vs. Debt to Equity When calculating the Long term Debt to Equity, always look at it in conjunction with the current ratio which takes into account the short term debt. Together - ‘Used to assess creditworthiness of the company’. Besides expansion and growth, is there any advantage of taking more debt? Yes - If a company can employ more debt and generate higher earnings than the amount needed to service the debt (i.e. interest charges), it improves the return to the shareholders as more earnings become available for distribution after payment of interest charges. For more on this see: Efficiency Analysis @ http://www.sanasecurities.com/return-equity-capital-employed-ratio
q q q In times of slowdown in economy, companies with high levels of debt find it increasingly difficult to service the interest charges on their borrowings as profit margins decline. Capital intensive industries like automobiles, steel, real estate, power etc generally have a higher Long Term Debt Equity Ratio compared to some other sectors (such as FMCG and Pharmaceutical companies) since they need to purchase property, plants and equipment to operate. Since creditors have a first right of payment of their principal and interest, Long Term Debt Equity Ratio also highlights the risk for the shareholders of the company.

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Long Term Debt to Equity Ratio

  • 1. www.sanasecurities.com Sana Securities Long Term Debt to Equity Ratio © Sana Securities| All Rights Reserved | www.sanasecurities.com
  • 2. Long Term Debt to Equity Ratio q What does this ratio indicates? Long Term Debt to Equity Ratio indicates the extent to which a company relies on external debt financing to meet its capital requirements. Net Worth = Share Capital + Reserve and Surplus Remember: When calculating the Long Term Debt Equity Ratio on a consolidated basis, the denominator will be the sum of Net Worth + Minority Interest. For more on this see: Efficiency Analysis @ http://www.sanasecurities.com/return-equity-capital-employed-ratio
  • 3. Balance Sheet - Tata Motors Limited (Consolidated)
  • 4. q Long Term Debt to Equity vs. Debt to Equity When calculating the Long term Debt to Equity, always look at it in conjunction with the current ratio which takes into account the short term debt. Together - ‘Used to assess creditworthiness of the company’. Besides expansion and growth, is there any advantage of taking more debt? Yes - If a company can employ more debt and generate higher earnings than the amount needed to service the debt (i.e. interest charges), it improves the return to the shareholders as more earnings become available for distribution after payment of interest charges. For more on this see: Efficiency Analysis @ http://www.sanasecurities.com/return-equity-capital-employed-ratio
  • 5. q q q In times of slowdown in economy, companies with high levels of debt find it increasingly difficult to service the interest charges on their borrowings as profit margins decline. Capital intensive industries like automobiles, steel, real estate, power etc generally have a higher Long Term Debt Equity Ratio compared to some other sectors (such as FMCG and Pharmaceutical companies) since they need to purchase property, plants and equipment to operate. Since creditors have a first right of payment of their principal and interest, Long Term Debt Equity Ratio also highlights the risk for the shareholders of the company.