Question

From the following information calculate :

(i) Debt Equity Ratio
(ii) Debt to Capital Employed Ratio

Equity Share Capital Rs 8,00,000; Preference Share Capital Rs 2,50,000; General Reserve Rs 90,000; Surplus i.e. Balance in Statement of Profit and Loss Rs 60,000; Non-Current Liabilities Rs 6,00,000; Current Liabilities Rs 2,00,000; and Current Assets Rs 4,00,000.

Hint:

Debt is the non-current liabilities of Rs. 6,00,000 and equity is Rs. 12,00,000, so Debt Equity Ratio is 1 : 2. Capital employed is Rs. 18,00,000, so Debt to Capital Employed Ratio is 1 : 3.

Answer 1

Step 1: Recall the two ratios:
Debt Equity Ratio = Debt / Equity.
Debt to Capital Employed Ratio = Debt / Capital Employed, where Capital Employed = Debt + Equity.
Debt means long-term borrowings, so only non-current liabilities count. Current liabilities are not debt.

Step 2: Find the debt:
Debt = Non-Current Liabilities = Rs. 6,00,000.

Step 3: Find the equity (shareholders funds):
Equity is made up of share capital, reserves and the surplus in the Statement of Profit and Loss.

Particulars	Rs.
Equity Share Capital	8,00,000
Preference Share Capital	2,50,000
General Reserve	90,000
Surplus (Balance in Statement of Profit and Loss)	60,000
Equity	12,00,000

Step 4: Calculate (i) Debt Equity Ratio:
Debt Equity Ratio = Rs. 6,00,000 / Rs. 12,00,000 = 1 : 2 or 0.5 : 1.

Step 5: Find Capital Employed:
Capital Employed = Debt + Equity = Rs. 6,00,000 + Rs. 12,00,000 = Rs. 18,00,000.

Step 6: Calculate (ii) Debt to Capital Employed Ratio:
Debt to Capital Employed Ratio = Rs. 6,00,000 / Rs. 18,00,000 = 1 : 3 or 0.33 : 1.

Step 7: Cross-check from the assets side:
Total assets = Equity + Debt + Current Liabilities = Rs. 12,00,000 + Rs. 6,00,000 + Rs. 2,00,000 = Rs. 20,00,000.
Non-current assets = Rs. 20,00,000 - Rs. 4,00,000 = Rs. 16,00,000.
Capital Employed = Rs. 16,00,000 + Rs. 4,00,000 - Rs. 2,00,000 = Rs. 18,00,000. It matches.

Final Answer:
(i) Debt Equity Ratio = 1 : 2 (0.5 : 1).
(ii) Debt to Capital Employed Ratio = 1 : 3 (0.33 : 1).