Question

The debt-equity ratio of Bajaj Auto and LML are 1:1 and 2:1, respectively. Which company, in your opinion, has got better debt-equity ratio and why? If LML wants to reduce its ratio, state any two remedies available to it to do so.

Answer 1

Compared to LML’s 2:1 debt-to-equity ratio, Bajaj Auto’s ratio is superior at 1:1 since it shows a balanced amount of debt and equity. It indicates greater stability and less financial danger, while a higher ratio, such as 2:1, indicates a greater reliance on borrowed money. LML can lower its ratio by doing the following:

1. Increasing shareholders’ funds by issuing additional equity shares.
2. Reducing debt by paying back long-term loans or redeeming debentures.