๐ What is Debt to Equity Ratio?
๐ฆ What is Debt to Equity Ratio?
Imagine you want to open a burger shop ๐.
โ๏ธ You have โน1,00,000 of your own money.
โ๏ธ You also borrow โน2,00,000 loan from a bank.
Now whatโs happening? ๐ค
๐ You are running your business with both your money AND other peopleโs money (loan).
Debt to Equity Ratio helps you understand this mix! ๐ฏ
๐ฏ What is Debt to Equity Ratio?
๐ Debt to Equity Ratio = Total Debt รท Shareholders' Equity
โ๏ธ Debt = Money borrowed from banks or others ๐ฆ
โ๏ธ Equity = Money owned by shareholders (like YOU) ๐ฐ
๐จ Funny Example:
Bunty opens a tea stall โ:
โ๏ธ He invests โน50,000 of his own money (Equity = โน50,000).
โ๏ธ Takes โน1,00,000 loan from his uncle (Debt = โน1,00,000).
๐ Debt to Equity Ratio = โน1,00,000 รท โน50,000 = 2
Means: For every โน1 of Buntyโs own money, โน2 is borrowed money!
๐ฎ So the business is running more on loan than on Buntyโs own cash!
๐ค Why is This Ratio Important?
โ๏ธ Tells how much the company depends on loans.
โ๏ธ Shows the financial risk โ more loans = more risk! โ ๏ธ
โ
Low Debt/Equity Ratio (below 1) = Company using mostly its own money = Safe ๐
โ High Debt/Equity Ratio (above 2) = Company depends heavily on loans = Risky! ๐ฃ
๐ฅ When Low Debt to Equity Ratio is Good?
โ๏ธ Company is safe during bad times (no loan burden)
โ๏ธ Less interest to pay = More profit! ๐
โ ๏ธ When High Debt to Equity Ratio is Dangerous?
โ Company must pay big interest โ even if no profit! ๐ฑ
โ During bad times โ risk of default or bankruptcy! ๐จ
๐ฏ But Waitโฆ High Debt is Not Always Bad!
Some industries (like construction ๐๏ธ or airlines โ๏ธ) NEED big loans to operate.
โ๏ธ If these companies earn well โ high debt is OK.
โ๏ธ But if profits fall โ they crash like a bad spaceship! ๐๐ฅ
๐ Quick Gyaan:
โ๏ธ Debt to Equity Ratio below 1 = Safe zone! ๐ก๏ธ
โ๏ธ Debt to Equity Ratio 1-2 = Acceptable for growing businesses! ๐ฑ
โ๏ธ Debt to Equity Ratio above 2 = Caution! Check more details! ๐
๐ Funny Tip:
Checking Debt to Equity Ratio is like checking your friend's credit card bill before lending him money โ
Too many loans? Better say NO! ๐ซ๐ณ๐
๐ In Short:
โ๏ธ Debt to Equity Ratio = How much loan vs own money in business.
โ๏ธ Low Ratio = Peaceful sleep for investors ๐ด
โ๏ธ High Ratio = Tension + Risk + Nightmares ๐ฌ
๐ก "A strong business stands on its own feet, not on borrowed crutches!" ๐ฆต๐ฐ