Debt-equity ratio rises as share of debt-funding dips

Written by Pradip Kumar Dey | Mumbai | Updated: Jan 3 2009, 03:22am hrs
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The share of borrowed funds in the balance sheet of 1500 companies decreased from 35.6% during 2006-07 to 27.8% during 2007-08, a study by FE has revealed. However, the quantum of debt of the companies increased from Rs 4.12 lakh crore in 2005-06 to Rs 5.59 lakh crore in 2006-07 and Rs 7.15 lakh crore in 2007-08, the study has found.

The net worth of the 1500 companies that constituted the study increased steadily from 6.33 lakh crore in 2005-06 to Rs 10.38 lakh crore in 2007-08, after reaching Rs 7.97 lakh crore in 2006-07. The debt-to-equity (D/E) ratio of the companies increased from 0.65 in 2005-06 to 0.70 in 2007-08.

The debt-to-equity ratio helps asses the extent to which a company is using borrowed money. It is obtained by dividing the total debt of the company by its share holders equity (net worth).

The D/E ratio is an important tool for financial analysis; it indicates the relative claims of creditors and shareholders against the capital employed of a company.

Among the 1500 companies that constituted the study, 673 saw a fall in the D/E ratio, while 808 witnessed a rise in the three years under consideration. The remaining nineteen companies' ratios were same for both years.

An analyst from a rating agency said, "Credit expansion of banks has grown in 2007-08 as compared to 2005-06, due to the healthy growth of the economy. This is reflected by overall growth in debt of corporates. The debt-equity ratio also increased due to more borrowing from banks by corporates as compared to raising their own funds as well as ploughing back internal cash generations."

In 2007-08, two major companies, Maral Overseas and Nova Petrochem, had D/E ratios of 15 or more. Companies that had a very low D/E ratio in 2007-08 were Dredging Corporation and Krishna Lifestyle.

A significant increase in the D/E ratio was noticed in the case of Simbhali Sugar, Alok Inds and REI Agro. Jayaswal Neco, Orient Paper and HMT saw a sharp decrease in D/E ratio. In terms of debt, the top five companies during 2007-08 were Reliance Industries, Indian Oil, NTPC, Power Grid Corporation and Reliance Communication.