QA Series S No 18 - Financial Statements – Part 03

 

The Banking Tutor

Question Answer Series 2025

S No 18                                                                    05-07-2025

Financial Statements – Part 03 

52. What is Debt Equity Ratio ? 

Debt Equity Ratio is the ratio between debt and equity. It indicates the relation-ship between the loan capital and capital raised by way of equity. 

53. What is the formula to arrive at Debt Equity Ratio? 

DER = Debt / equity.  In the numerator we take only Long Term Outside Liabilities as Debt. 

54. What is the Benchmark DER ? 

The optimal debt/equity ratio is 1:1. However, it cannot be applied to all situations. In respect of traders, loans from friends and relatives received on a long term basis, subordinated to the Bank can be treated as equity. 

55. Under which class of Ratios, DER falls? 

DER is included under gearing ratios. 

56.  What is meant by Gearing Ratio ? 

Gearing ratios are a metric used to demonstrate the funding of an entity’s operations i.e. whether it was covered through debt or the investment made by shareholders. 

57. What is meant by Capital Structure of a Firm ? 

A company's capital structure refers to how it finances its operations and growth with different sources of funds. 

58. What is the other name for ‘Capital Structure’? 

Capital structure is sometimes referred to as "financial leverage". 

59. What are the main sources for a Capital Structure? 

There are two main forms or sources of capital for a capital structure: equity capital and debt capital (loan capital).

60. What is the main difference between Equity and Loan Capital? 

The main difference between loan capital and equity is that the interest payable on the loan capital has prior charge and has to be paid before any dividend can be declared. While there can be no dividend without profits, interest may have to be paid even if there is no profit. 

61. Why DER  is also known as ‘External-Internal Equity Ratio’? 

As the debt to equity ratio expresses the relationship between external equity (liabilities) and internal equity (stockholder’s equity), it is also known as “external-internal equity ratio”.

62. What is the purpose of Turnover Ratios? 

These ratios basically measure the efficiency with which assets are being utilized or managed. 

63. What are other names for  Turnover Ratios? 

Turnover Ratios are also known as Activity Ratios;  Productivity Ratio, Efficiency Ratio. 

64. What is Debtor Velocity Ratio? 

Debtors Turnover Ratio measures the efficiency with which Receivable are being managed. Hence it is also known as ‘Receivable Turnover ratio’. Debtor’s turnover ratio or accounts receivable turnover ratio or velocity ratio indicates the velocity of debt collection of a firm. In simple words, it indicates the speed of collection of credit sales. 

65. How to understand Debtor Velocity Ratio? 

The higher the value of debtor’s turnover the more efficient is the management of debtors or more liquid the debtors are. Similarly, low debtors turnover ratio implies inefficient management of debtors. 

66. What is Average Collection Period ? 

The average collection period is calculated by dividing the average balance of accounts receivable by total net credit sales for the period and multiplying the quotient by the number of days in the period. 

67. What is the importance of Average Collection Period for Company? 

The average collection period (ACP) is crucial for businesses as it indicates how efficiently they convert sales into cash, impacting cash flow and financial health. 

68. How to understand Average Collection Period ? 

A shorter ACP signifies faster payment collection, which is generally preferred, while a longer ACP might indicate issues with credit policies or collection efforts. 

69. What is Creditor Turnover Ratio ? 

The creditor turnover ratio measures how quickly a company pays its suppliers. It indicates how many times a company settles its outstanding debts with suppliers during a specific period, typically an accounting period. 

70. What are other names for Creditor Turnover Ratio? 

Creditors Turnover Ratio is also known as Accounts Payable Turnover Ratio. 

71. How to understand Creditor Turnover Ratio? 

Higher Ratio indicates that a company is paying its suppliers more frequently, suggesting efficient cash management and good relationships with suppliers. It can also mean the company is taking advantage of early payment discounts or has strong negotiating power with suppliers. 

Lower Ratio suggests that the company is taking longer to pay its suppliers. This could indicate potential liquidity problems, strained supplier relationships, or strategic decisions to delay payments for better cash flow management. 

Next Issue  will be shared on 7^th   July 2025.

Sekhar Pariti

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