Long term Debt Equity ratio
The debt equity ratio is an important tool to appraise financial structure of the firm. It reflects relative contribution of creditors and owners of business in its financing. In the initial periods company relied heavily on the long term debts. The shareholders stand to gain, as they would be able to retain control with a limited stake and the returns were magnified. However this lead to the inflexibility of operations as creditors exercised pressure and interferes in management.
Moreover the company had to face a heavy burden of interest payments. However in the recent year the debt equity ratio of 0.7:1 is maintained that implied sufficient safety margin to the creditors and substantial protection against shrinkage in assets. The servicing of debt is also less burdensome and consequently the company’s credit standing is not adversely affected, its operational flexibility is not jeopardized and it will be able to raise additional funds in case it plans for expansion or diversification of business.
On considering total debt equity ratio, it may noted that it almost overlaps long term debt
Equity ratio. This indicates that the company has right from its inceptions not relied heavily on short term funds where the cost involved is much higher than that of long term funds.
The debt equity ratio is an important tool to appraise financial structure of the firm. It reflects relative contribution of creditors and owners of business in its financing. In the initial periods company relied heavily on the long term debts. The shareholders stand to gain, as they would be able to retain control with a limited stake and the returns were magnified. However this lead to the inflexibility of operations as creditors exercised pressure and interferes in management.
Moreover the company had to face a heavy burden of interest payments. However in the recent year the debt equity ratio of 0.7:1 is maintained that implied sufficient safety margin to the creditors and substantial protection against shrinkage in assets. The servicing of debt is also less burdensome and consequently the company’s credit standing is not adversely affected, its operational flexibility is not jeopardized and it will be able to raise additional funds in case it plans for expansion or diversification of business.
On considering total debt equity ratio, it may noted that it almost overlaps long term debt
Equity ratio. This indicates that the company has right from its inceptions not relied heavily on short term funds where the cost involved is much higher than that of long term funds.