Companies show high debt-to-equity ratio

Written by Pradip Kumar Dey | Mumbai, Aug 18 | Updated: Aug 19 2007, 05:08am hrs
An analysis of debt-to-equity ratio (D/E ratio) of 500 major companies with sales more than Rs 100 crore between 2006-07 and 2005-06 show an upward trend. D/E ratio of these companies went up from 0.61 during 2005-06 to 0.65 during 2006-07. While 248 firms saw a fall in the D/E ratio, 224 witnessed a rise in the two years under study. Rest twenty-eight firms ratios were same for both the years.

Total debt of these companies increased 38.3%, from Rs 1,62,157 crore in 2005-06 to Rs 2,24,296 crore in 2006-07. The net worth of these companies increased steadily at 29.9%, from Rs 2,66,358 crore in 2005-06 to Rs 3,46,208 crore in 2006-07.

D/E ratio helps one asses to what extent a company is using the money it borrowed. It is simply obtained by dividing the total debt (total loan funds) of the company by its share holders equity (net worth).

In 2006-07, two major companiesIspat Industries (13.17) and Govind Rubber (27.52)had ratios of thirteen or more. Companies that had a very low D/E ratio in 2006-07 were TCS (0.01), HCL Technologies (0.01) and Philips EI India (0.01).

A significant increase in the D/E ratio was registered by Tisco ( 0.26 in 2005-06 to 0.69 in 2006-07) and Ranbaxy Lab (0.43 to 1.35).