Debt To Capital Ratio - Explained in Hindi | #38 Master Investor - YouTube

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Namashkar, my name is Mukul and welcome to Asset Yogi

In this video, we are going to discuss debt to capital ratio

In the previous video, we covered debt to assets ratio

If you haven't watched that video then do watch it. You'll get the link in the description

When we talk about debt to capital ratio, it is not much different from the debt to asset ratio

In that, we saw what is debt as a percentage of total assets

That is basically the debt ratio

When we talk about debt to capital ratio

We calculate debt as a percentage of total capital in the business from that

What is the total capital?

Equity capital, long term debt or short term debt

In this video, we'll see what is the exact formula of debt to capital ratio and how its calculation is done

With that, we'll see what is its interpretation

With that, I'll show a live calculation online

So watch this video till the end. Let's switch to the blackboard

Debt to capital ratio is a variation of debt to equity ratio

In debt to equity ratio, we divided total debt by total equity

So what do we get in this?

What is the proportion of debt and equity in a company's capital structure

That means what percentage of the debt and what percentage of equity

We can check this from this ratio

So when we take total debt, we talk about the long term and short term debt both

You get the short term debt from current liabilities and long term debt from non-current liabilities

When we talk about debt to capital ratio

Instead of taking total equity in the denominator, we take total capital used in the business

We saw total debt = long term debt + short term debt

What is the total capital?

Total capital = total debt + equity

So you get the total capital

When we calculate debt to capital ratio

We calculate debt as a percentage of capital

That means we can check the debt financing in the total capital

Let's take its example

Let's say long term debt in a company is Rs 70 Cr

and short term debt of Rs 30 Cr

and the equity capital of Rs 80 Cr

So how much is the total debt?

Let me write debt here

It is Rs 100 Cr

And if we talk about the capital, how much will it be? It will be the total capital

So lets write here the capital and that is Rs 180 Cr

So if we have to calculate the D/C ratio, we'll write the total debt in the numerator

which is Rs 100 Cr

divided by Rs 180 Cr which is the total capital

So if we'll calculate its ratio, it will be 0.56

That means our debt is 56% of the total capital

This is the meaning

So we took debt as a total % of capital and when we saw the debt to equity ratio

we took debt as a proportion of equity

So broadly, the output is same in both cases

We saw that ideally, D/E ratio should be less than 1

So in that case, what should be he ideal D/C ratio?

It should be 0.5

If it is 1, that means 50% is debt and 50% is equity

That means if we'll calculate debt as a percentage of capital then it will come to 50%

So debt should not be more than 50% ideally if we talk about total capital structure

If D/C ratio increases, lets say more than 0.5 then that means

that company's financial risk is increased and the solvency may become weak

In future if the debt increases, there are chances of the company getting insolvent and bankrupt increases

But should it be less than 0.5 for all the companies and sectors?

No that's not correct. We are talking for general cases

Basically, we are saying less than 0.5 because when there is a tough time for a company or there are bad market conditions

Then the chances of surviving of the companies with lower D/C ratio increases

because you have to do the interest payments irrespective of the market conditions

If you want to compare the companies, you should compare the companies of the same sector

You cannot compare Reliance with Infosys

You can compare Reliance with Indian Oil which is in refining business or with Bharat Petroleum

You'll compare Asian Paints with Berger Paints

In this way, you should compare the companies of the same sector

After that, when the higher D/C ratio is acceptable?

Let's say when more than 0.5 is acceptable?

When the cash flow of companies or industry are stable

For example, the power or infrastructure companies have lengthy contracts like for 20-30 years

So their cashflows are normal or quite stable because they know they'll get at least this much money

Cashflows of the banks are also stable and that's why higher D/C ratios are also acceptable

But nevertheless, you should calculate the average of an industry and compare on the basis of that

When the higher D/C ratio is not acceptable?

When there is a uneven cash flow of a company or industry

For example in construction industry, it depends on the contract

It can be more or less in different years

So the D/C ratio of these companies should be less

Rather I would say that less than 0.3 should be considered

What type of companies has lower debt ratio?

For example, there are software, retail, services companies

These companies don't take much debt and you'll always get less D/C ratio

I think the D/C ratio concept is clear to you. Now let's quickly calculate for a company online

So I took the Reliance Industries financials again

I took this same example in D/E and D/A ratios

So let's calculate for this so that this becomes clear to you

You can search for any company on the moneycontrol website

You get financials on the left-hand side

So this is the balance sheet because we want debt and equity

So as you can see, total equity is the total shareholder's funds

Rs 31463 Cr. This is the total equity capital

After this, we need long term debt. So we'll get long term borrowings from here which is Rs 81596 Cr

Also, we need short term debts. So here are the short term borrowings

Rs 15239 Cr

So basically, let's calculate the total debt and the total capital

So how much is the total debt?

Rs 15239 Cr is the short term debt and the long term debt is Rs 81596 Cr

If you will add this, it will come out Rs 96835 Cr

And how much will be the total capital?

In the total debt which is Rs 96835 Cr, we'll add this equity which is Rs 314632 Cr

So the total capital coming out is Rs 411467 Cr

Now for the D/C ratio,

We'll divide Rs 96835 Cr which is the total debt by the total capital which is Rs 411467 Cr

The figure coming out is Rs 0.235

What does 0.235 mean?

This means the debt of Reliance in the FY 2017-18

is 23.5% of the total capital

We can understand this

Which is not bad at all because the D/C ratio is very less and comfortable here

and the company is not much dependent on debt

See, it's very clear from here

that their equity is very strong and they have high reserves and surplus

So in this way, we analyse different ratios

In the upcoming videos, I'll cover the remaining ratios also so do watch those videos

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