Leverage ratios are used to analyze the long-term financial position and solvency of a business. There are two types of solvency or leverage ratios: structural ratios and coverage ratios. The debt-equity ratio is the most commonly used structural ratio to test a firm's solvency. It expresses the relationship between a firm's debt and equity. A high debt-equity ratio relative to industry standards indicates greater financial risk, while a lower ratio signals lower risk. The standard debt-equity ratio considered acceptable is 1:1.

1. Ansif Ek

2.  The term solvency means ability of a firm to
pay the outside liabilities
 Leverage ratios are used to analyse the long
term financial position of a business
 There are two types of solvency or leverage
ratios are Structural Ratios and Coverage
Ratios

3. LEVERAGE RATIO
STRUCTURAL
RATIO
DEBT
EQUITY
RATIO
TOTAL
ASSETS DEBT
RATIO
PROPRITARY
RATIO
SOLVANCY
RATIO
COVERAGE
RATIO

4.  It indicates the long term solvency of the firm
 This ratio is used to analyse the long term financial
position of a firm
 Also known as Capital structure ratio
 Important structural ratios are Debt-equity ratio ,
Total asset to debt ratio ,Proprietary ratio ,solvency
ratio

5.  Most commonly ratio used to test the solvency of a
firm
 Expresses the relationship between debt (external
equity) and equity (internal equity)
 So this ratio is also called External-Internal equity
ratio, Security Ratio
 Two forms of debt equity ratio
 Long term debt equity ratio
 Total debt equity ratio

6.  Long term debt equity ratio = long term
debt / Equity
 Long term debt refers to the fund invested by
outsiders (Debentures ,long term loan)
 Also known as external equity or borrowed fund
 Equity means fund invested by shareholders
(equity ,preference share capital, reserves and
surplus)
 Also known as shareholders fund or internal fund
 All accumulated losses and fictitious assets(pre
exp) are deducted so we get Networth

7.  Total debt equity ratio = Total debt / Equity
 Total debt =include all debt whether long term or
short term (current liability)
 The standard debt equity ratio is 1:1
 This ratio is important to long term creditors A
high ratio indicates the safety of creditors and
viceversa
 Very useful for analyzing long term financial
condition of a company

8. Calculate Debt equity ratio from the balance sheet given below :
Liabilities Rs Assets Rs
Equity shares 100000 Goodwill 60000
Reserves 20000 Fixed assets 140000
P&L a/c 30000 Stock 30000
Secured loan 80000 Debtors 30000
Creditors 50000 Advances 10000
Provision for tax 20000 Cash 30000
300000 300000

9. Debt equity ratio = Long term debt / Equity
Long term Debt = 80000
Internal equity = 100000 + 20000 + 30000 = 150000
= 80000 / 150000 =.53
= 053 : 1