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Debt To Equity Ratio - Explained in Hindi | #36 Master Investor - YouTube
Channel: Asset Yogi
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Namaskar, my name is Mukul and you are welcome to the Asset Yogi
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In this video, we will discuss a very important ratio
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Which is debt to equity ratio
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The debt to equity ratio is the solvency ratio
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All the investors and analysts see it very carefully
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And why is that?
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I will tell you the reason.
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See when you invest in any company then a very important part for you is
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Whether the stock rises or not, at least your principal should be protected.
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Your money should be protected. Your money shouldn't be zero.
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Why will it become zero? If the company gets bankrupt then the money will be zero.
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So if the company is in business
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That means it is solvent
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Now, we know that it is solvent by the solvency ratios.
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And the most important ratio in that is the debt to equity ratio.
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We will know that in this video.
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How is its calculation done?
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And how to interpret it?
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I will show you a live calculation with that.
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Before watching this video, please watch one more video
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The one which is liquidity versus solvency
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I have explained the difference between liquidity and solvency in that
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Then also I will tell you in short.
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We get to know the short-term position of the company by liquidity.
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If the company is liquid or not
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The company shouldn't have a problem in the short term
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We get to know the overall financial position of the company in the short term
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and long term both.
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So let's understand the debt to equity ratio in this video properly
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Please watch this video till the last
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Let's go straight towards the blackboard.
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Music
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See the formula of debt to equity ratio is quite simple.
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We will divide the total debt of the company
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By the total equity capital.
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So now what is this total debt?
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This is your long term debt
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Plus short-term debt
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We have to add both of them.
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You will get the long term debt by non-current liability
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You will get the short term debt by the current liabilities
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in the balance sheet.
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Some analysts only take long term debt
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Whatever formula you are using
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If you are taking only long term debt to compare the companies,
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use the same formula in both and if you are using a single website,
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so use the same website to compare both the companies.
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But if you ask me ideally you should take both long term debt and short term debt.
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Because we want to see the solvency position of the company.
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whether there is any solvency risk or not so we should ideally take its total debt
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Let's calculate it with an example.
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Let's say the long term debt in the company is 100 crores.
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And in short term too,
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In the short term, I reduce a little.
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Let's say the short term is 50 crores.
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And let's say the equity capital of the company
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We also call it shareholders funds.
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Let's say the total shareholder's funds is 100 cr
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So here our debt-equity ratio will be
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We will write total equity share capital below in the denominator.
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And on top, we will write Total Dept.
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150 crore will come on the top.
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The debt-equity ratio is 1.5
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So now 1.5 debt-equity ratio is a comfortable position?
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or is it an uncomfortable position
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for it, I tell you some important points of debt-equity ratio
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Firstly debt-equity ratio should always be less than one
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Your ideal ratio should be less than 1.
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Only then will a company be in a comfortable position.
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So if the debt is less than your total equity capital
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So at least the company will have money to pay and it will be in a comfortable position.
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In this case, it is more than 1 hence, it is an uncomfortable position
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If you ask me
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Then suppose if the market turns bad and the company's tough time starts.
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So in such cases lower debt-equity companies
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Whose debt will be less
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There are more chances for that company to survive.
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Otherwise, debt is such a liability that you have to pay
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If your profits are being eroded then also you have to pay interest.
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Principal and interest have to be paid every month.
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So debt is such a thing that can also bankrupt the company.
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When you are comparing companies, keep one more thing in mind
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that you have to compare only the company with the same sector at debt-equity ratio.
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And we talk about higher debt-equity ratio companies
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For example power companies, who manufacture power plants
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they take on more debts because generally all projects are made out of project finance.
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Bank also has a lot of debt.
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You will generally get a high debt ratio for this type of company.
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And if we talk about the low debt-equity ratio
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So you will get a lower debt-equity ratio of retail companies.
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The debt-equity ratio of software companies or service companies will be low.
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Now let's quickly calculate the debt-equity ratio.
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Live from the website.
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I have opened the financials of Reliance Industries.
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From the money control website.
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From the search option, you can open the financials of any company.
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left-hand side in the financials you can see the balance sheet, profit and loss statement
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We have opened the balance sheet.
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From here we will get to know the position of equity and debt.
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So here total shareholders funds are total equity
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We get our total equity from here
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Now we want long term debt,
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here we get long term borrowings of 81,596 cr
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Now we want short term borrowings that also we get from here of 15,239
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Now let's calculate the debt-equity ratio
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What is our total debt
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If we add 81,596 and 15,239 so we the total debt of 96,835
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I write here,96,835
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Divided by total shareholders funds
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Total equity is 3,14,632
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So after calculation, it will be approximately 0.31
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You don't have to do the calculation.
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Here you get the ratios directly
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Let us see the ratios as well
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Here in the profitability ratio, it is showing 0.31 total debt-equity
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So you don't need to calculate by yourself.
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But you should understand the interpretation.
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This is a comfortable position
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It is less than 1.
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The debt-equity ratio is 0.31
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That means the debt is 30% compared to equity.
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We saw the ratio of Reliance only.
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Now if we want to compare with the competitor.
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Indian oil is its competitor and it is also in the refining business.
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We can check its ratios.
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We come across the ratios of Indian Oil.
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Let's look at total debt-equity
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Its debt-equity is 0.50.
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That means Its debt-equity ratio is slightly higher
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Again it is also in a comfortable position.
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But if we compare both the companies, then Reliance is in a better position
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in the comparison of the debt-equity ratio
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So similarly we should check all the ratios
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When we do a fundamental analysis of any stock or a company
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I have already made videos on many of these ratios
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And I will cover all these ratios in upcoming videos.
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so keep watching these videos
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I hope you liked this video
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So please like and share it.
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If you have any suggestions and if you want to suggest any topic for future videos.
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So you can comment below.
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So see you in the next video
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Till then keep learning, keep earning and be happy as always
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