## Financial Ratios Basics & Types || Debt to Equity Ratio (DE Ratio)

ITC, Reliance, Hindustan Unilever,

Axis Bank, TCS. Which stock is right to invest? There are more than 5000 listed companies

in India. And this question might often

come to your mind that out of these so many companies,

in which should I invest? Let’s make this decision of yours easy. Financial Ratios, which is also

the subject of our today’s video. Financial Ratios are used to measure

the health of any company. You can also use them to compare

any two companies. Let’s start today’s video on

Financial ratios. Hello friends,

my name is Abhishek and I work in the

investment products team at Smallcase. Let’s start today and understand the first

point, what are the Financial ratios. Like you have your blood report,

where it has your cholesterol level, it has your platlet count,

it has your sugar level. Similarly, there are other parameters,

but these are such parameters, which tell you how your overall health

is doing. Similarly, Financial ratios tell us about

the health of any company, how that company is doing. Here, you can judge a company by using

the parameters of Financial ratios. Similarly in a blood report, from cholesterol level you can

know how your overall health is. Now the important thing here is, that to measure the health of any company,

to judge how good or how bad it is It is always benchmarked

with relevant benchmark. For example, to measure the overall health of India there are two indexes Nifty 50

and Sensex 30. These two indexes measure and track

the largest Blue chip stocks of India. And they overall measure the health,

how Indian Economy is behaving. So here if you compare financial ratios

of any company with Nifty or BSE sensex then you will know, how the health of that company is,compared

to the overall health of the economy. Next we will talk about that… by using those financial ratios you can

compare any company with its industry. For example, if we talk about banks,

Axis Bank, HDFC Bank, Federal Bank, State Bank of India. For all these companies, NPA which is called Non-performing assets,

is an important financial parameter. So if you see that NPA

for Axis Bank is 10% to take the decision on this basis

only if Axis Bank is a good company or a bad company, will be wrong. You have to check NPAs

for other banks as well. And if NPA of Axis Bank is the least, this means that, that company is

the best company in its industry. And the second important thing

here is Financial ratios, which we will discuss today. On their basis only, we should not judge if

I should invest in this company or not. Other financial ratios are there, just

like your blood report has many parameters. Cholesterol level is just one of them. Similarly the financial ratios

we will talk about today, those are few important financial

ratios among many Financial ratios. You can check them before

taking any investment decision. But you should not invest on the

basis of only these ratios. Like I have told you now, there are a lot of financial

ratios available in the market. We can divide all these financial

ratios into five broad categories. We will take them one by one. The first category is liquidity ratio. Liquidity financial ratios are

those ratios which help you and tell you how capable the company is to

meet its liabilities in short-term. It also tells how effective

is company’s management to manage its working capital. Let’s talk about second ratio.

They are called turnover ratio. Turnover ratios of those

ratio usually which tell you how any company is capable of

converting its assets or accounts quickly or effectively to

sales or to free cash flow. Third kind of financial ratios are

Profitability ratios. Profitability ratios help you to know how much is the profit generating

capacity of any company. This ratio will also help you if you want to know if any company

is loss making or profit making. This ratio helps you there as well. Fourth kind of ratios are solvency ratios. These ratios tell you how capable the company is to

meet its long-term debt obligations. Usually, long-term is more than one year. So if the company has taken any loans and

its interests are due after 1 or 2-3 years. These ratios will help you to know, how

able that company is to clear those dues. Fifth and the last kind of ratios are

Valuation ratios. Valuation ratios tell about any company

how attractive that company is as an investment opportunity right now. Friends, this way we have categorised

all the ratios into five categories. Now, among those five categories,

we will talk about top financial ratios, using which you can measure

the health of any company. Let’s talk about the first ratio. Debt to equity ratio. It is a solvency ratio. And this ratio tells you the ratio of

the company’s total debt to its equity. Let’s take an example here. Total assets of a company are Rs. 100.

Out of it, 50 are debt and 50 are equity. Company has financed its total

business operations in debt and equity in equal weight. Here the debt to equity ratio will be

50 divided by 50, means 1. Similarly, there may be few companies

whose ratio maybe debt is 80 and equity is 20,

then it will be 80 by 20, which is 4. This way you can measure debt to equity

ratio by dividing debt to equity. Now let’s talk about implications.

How you can use this ratio? When you calculate debt to

equity ratio of any company, generally the lower debt to equity

ratio is considered better. Because it means that the company’s debt

repayment capacity is much better. And since the debt is low on its book, interest to be paid by it

will also be comparatively less. So, here, financially it is pretty secure. The second thing we should know that the creditors have faith in the

company. Since its debt level is low, So… that it can follow

its debt capacity better and it can repay it easily

in case of any calamity. Whereas for those companies

whose debt level is high, it may happen that if economy is not

doing good or it’s in cyclical business, then it may not repay its debt

and it may default. You might have seen many default cases

occurring in Indian markets nowadays. For example IL&FS defaulted

in last September. This means that it cannot repay

its interest. Recent, very recent example is

Altico Capital. They missed their interest payment

of Rs. 20 crores. So if there are companies which

cannot repay their interest payment, then these companies

are not considered good. And there are many such companies where

we have to see their debt to equity ratio. Important thing here is to compare

this ratio within the industry. For example, D/E ratio of textile,

cement, manufacturing companies is high because they need more debt financing

as compared to equity. Whereas the debt to equity ratio

of food or IT companies is generally less. Because there is not much

industry specific need of debt financing. Let’s understand through an example. For example debt to equity ratio

of Reliance Industries is 40% versus industry average

which is around 65 to 70%. Reliance has used less debt

as compared to equity, in its own industry as compared to

its benchmark, as compared to its peers. So, here, as you can see

Reliance has financed its business and its growth operations using less debt. And hence Reliance is less risky

because whenever it’s debt is due, it is better capable of repayment

of its interest payments. Let’s take the second example

of Hindustan Unilever. Hindustan Unilever works in FMCG and

its debt to equity ratio is almost zero as compared to industry

which is around 20%. Friends, it is very important to know here

that debt can be zero. And if debt is zero means all of its

operations are financed by equity. As you have seen from the examples here, both Reliance and HUL are pretty good stocks. They’ve performed

very good over the past five years. But Reliance has debt

and HUL doesn’t have debt. So, it’s not necessary that the company

with high debt to equity ratio is always bad or it will perform badly. This ratio is more industry specific

and hence use it as a benchmark. Like we have compared Reliance’s

with industry benchmark and HUL’s with its industry benchmark. And we saw that for both of them, ratio

is lower than their industry benchmark. and how both companies

have performed better in the past 5 years. But it’s better not to compare

Reliance and HAL with each other. Because their industries are different,

their industry dynamics are different. Hence, their debt requirements

are different and hence the debt to equity ratio

comes out differently. Friends, in this video we spoke about

debt to equity ratio. In the next video of this video series

of financial ratios we will cover four more ratios, which are, Return on Equity ratio,

Dividend yield ratio, PE ratio and free cash flow to Sales ratio. Make sure to subscribe to this channel. And press the bell icon to get the notification

as soon as our next video is published.

🙂

👌👌👌👍👍👍

Hello , This is the first video of our Financial Ratios Video Series. Stay tuned for more videos 🙂

Also, do let us know in comments if you have any queries/questions

👍👍👍

Suggest debt and liquid fund park my money 1 year

I bull housing ka Kya hoga

सर जीरोधा डीमैट अकाउंट खोलने के लिए क्या सैलरी अकाउंट को देना जरूरी है मैं अपने अलग खाता जो मेरा एक्सिस बैंक में है उसका डिटेल दे कर जरोदा में डिमैट अकाउंट खुलवा सकता हूं क्या प्लीज सुझाव देवें

DON'T you share these videos on linkedIn and other social media to reach the masses

2nd Video about Return on Equity Ratios on this Financial Ratios video series is live : https://www.youtube.com/watch?v=skjd4_iy9O0

Weightage means in your smallcase portal what… How many share u have allocate. Call me 9971554878

unfortunately the nifty 50 and Sensex 30 are not the accurate barometers of the health of the economy or industries or sectors. These indexes I believe are actually misleading coz for e.g. currently these are zooming like crazy but mid-caps, small caps, finance, auto, banks, NBFCs, realty etc are not performing similarly. So basically these indexes don't reflect the state of the broader markets/industries/sectors

Please avoid speaking in HINGLISH it's irritating