Question

Considering your company’s debt ratio, discuss how they should utilize bank and equity financing for the next period.

Answer 1

Debt to equity ratio is something very important to any kind of business and is one which always has to be kept an eye on. Firstly its important to know whats the industry avergae debt to equity ratio for the industry in which your company operates. A debt to equity ratio of 1 - 1.5 is commonly seen as a good ratio. But this will definetely vary from industry to industry.

So after realising the industry averge, we should check as to where we stand. If our ratio is better higher than that of the industry average, then we must focus more on equity financing for the next period so that we can bring the ratio down. In case our ratio is lower than industry average then we should focus more on debt financing till we are on par with the industry or so.

Its not necessary that the industry average itself has to be checked always, If the company had a preset level of debt ratio in mind, then it would always be better to do the financing according to that and maintain that same level of debt ratio at all times.

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