If any body say to me, " How can we simplify the debt to equity ratio?", I will answer that debt equity ratio is just a simple technique which a bank will check when it will approve or reject any bank loan.
Suppose company want to get $ 10,00,000 loan from XYZ bank. Bank is so smart. Bank manager will check previous year balance sheet and then finds the value of his already taken debt and equity share capital value and then calculates this ratio by debt divided by equity capital.
Suppose that company's debt equity ratio is 5 : 1, it means company has only 1$ equity capital for paying every $ 5. (*Always remember equity share capital is just like a person's own capital. Because equity shareholders are the real owner of company.) It is most risky position, bank will reject this loan to that company after calculating and seeing the overall financial position with this small ratio. So, it is Brahma Astra in the hand of bank manager.
Suppose company want to get $ 10,00,000 loan from XYZ bank. Bank is so smart. Bank manager will check previous year balance sheet and then finds the value of his already taken debt and equity share capital value and then calculates this ratio by debt divided by equity capital.
Suppose that company's debt equity ratio is 5 : 1, it means company has only 1$ equity capital for paying every $ 5. (*Always remember equity share capital is just like a person's own capital. Because equity shareholders are the real owner of company.) It is most risky position, bank will reject this loan to that company after calculating and seeing the overall financial position with this small ratio. So, it is Brahma Astra in the hand of bank manager.
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