➡️Debt:
Imagine Nimbu Pani Wale Bhaiya wants to expand his business, but he needs some extra cash to do it.
So, he decides to take a loan from the bank. That loan is called "debt."💰
Imagine Nimbu Pani Wale Bhaiya wants to expand his business, but he needs some extra cash to do it.
So, he decides to take a loan from the bank. That loan is called "debt."💰
➡️Equity:
Now, he also wants to bring some partners to invest in his business.
When they invest, they become part-owners of the business and share the profits and losses.
This ownership is called "equity." 💼
Now, he also wants to bring some partners to invest in his business.
When they invest, they become part-owners of the business and share the profits and losses.
This ownership is called "equity." 💼
Debt to Equity Ratio (D/E):
The D/E ratio helps us understand how much the business is funded by debt compared to equity.
Let's Calculate:
D/E= Total Debt ÷ Total Equity Investment
But why does it matter?⤵️
The D/E ratio helps us understand how much the business is funded by debt compared to equity.
Let's Calculate:
D/E= Total Debt ÷ Total Equity Investment
But why does it matter?⤵️
• High D/E = He relies more on borrowed money to run his business.
This could be risky as he has to pay back debt along with int.
• Low D/E = He has more equity compared to debt.
It shows that he has more of his own or his partners' money invested, which is more stable
This could be risky as he has to pay back debt along with int.
• Low D/E = He has more equity compared to debt.
It shows that he has more of his own or his partners' money invested, which is more stable
However, since Nimbu Pani is not a heavy asset business, the ideal debt-to-equity ratio may be around 1, but it's important to remember that the ratio can vary depending on the specific nature of the business and industry.
The D/E ratio is an important factor to consider during fundamental analysis, but there’s more to consider.
To learn more Fundamental analysis basics, watch this course on Value Investing on Quest - bit.ly
#DumpYourFears
To learn more Fundamental analysis basics, watch this course on Value Investing on Quest - bit.ly
#DumpYourFears
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