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What is debt-equity ratio?

Debt-equity ratio is a measure of leverage, indicating proportion of company's total capital contributed by secured and unsecured debt. A high debt-equity ratio, generally 2:1 and above, is not considered favourable for companies. Also, this ratio varies from industry to industry.



Debt-equity ratio = Secured + Unsecured debt

Shareholders Funds


E.g.: As on 31st March 2010, company had secured loan of Rs. 70 crore, unsecured loan of Rs. 30 crore, shareholders funds (equity and reserves) of Rs. 200 crore.



Debt-equity ratio = 70 + 30

200



Debt-equity ratio = 0.5:1

Source: sptulsian.com

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