Formula :. Liabilities including Finance lease and Defined Benefit Plans if any / Equity including Preferred Stocks, Undistributed Profits + Liabilities
Capital is very important for growth of any company. It is like starting point of any company with which it will start it’s life. It could be working capital or capital for long term like equity or debt.
Why this Ratio is important? Because Debt capital is borrowed capital. It is not owned by shareholders. So when company is making asset with the help of borrowed capital, it supposed to take care of servicing of the funds or else Bank or Debenture holder is the owner of such asset.
If the capital structure of company having large percentage of debt then it maybe not good sign as bankers hold first right on assets.
But in some type of business, high leverage is important like banking. There you need to borrow funds that is how bank will make business. Here I want to clear that ratios used in banking is different story. This ratio is not for Bank but for manufacturing company as Service sector companies hardly need to take any debt on their balance sheet.
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