Question

Calculate the Debt to Capital Employed Ratio from the following information:

Debt to Equity Ratio 2 : 1; Long-term Borrowings ₹ 18,00,000; Long-term Provision ₹ 6,00,000; Reserves and Surplus ₹ 2,00,000.

Answer 1

Calculation of Debt (Long-term Debt):

\[\text{Debt} = \text{Long-term Borrowings} + \text{Long-term Provisions}\]

$$\text{Debt} = ₹ 18,00,000 + ₹ 6,00,000$$

$${\text{Debt} = ₹ 24,00,000}$$

Calculation of Equity (Shareholders’ Funds):

$$\text{Debt to Equity Ratio} = \frac{\text{Debt}}{\text{Equity}}$$

$$2 = \frac{24,00,000}{\text{Equity}}$$

$$\text{Equity} = \frac{24,00,000}{2}$$

$${\text{Equity} = ₹ 12,00,000}$$

Calculation of Capital Employed:

$$\text{Capital Employed} = \text{Equity} + \text{Debt}$$

$$\text{Capital Employed} = ₹ 12,00,000 + ₹ 24,00,000$$

$${\text{Capital Employed} = ₹ 36,00,000}$$

Calculation of Debt to Capital Employed Ratio:

$$\text{Debt to Capital Employed Ratio} = \frac{\text{Debt}}{\text{Capital Employed}}$$

$$\text{Debt to Capital Employed Ratio} = \frac{24,00,000}{36,00,000} = \frac{2}{3} \approx 0.6667$$

Debt to Capital Employed Ratio = 0.67 : 1