Accountancy Part BAccounting Ratios

Identify the debt-equity ratio that is normally considered safe.

Based on following data related to Ambe limited, Jaipur, Answer question.

	₹
Revenue from operations	8,40,000
Cost of revenue from operations	4,20,000
Selling Expenses	80,000
Administrative Expenses	40,000
Equity share capital	1,00,000
8% preference share capital	50,000
10% debentures	1,00,000
Profit after Tax	1,74,000
Tax Rate	40%

Answer & explanation

Correct answer: option 2

The correct answer is Option (2) → 2 : 1

The debt-equity ratio compares long-term debt with shareholders' funds. A debt-equity ratio of 2 : 1 is normally considered safe, though it varies from industry to industry.

For Ambe Limited: debt (10% debentures) = ₹1,00,000; equity (equity + preference share capital) = ₹1,50,000; ratio = 1,00,000 : 1,50,000 = 2 : 3, well within the safe limit.

NCERT (2026-27 edition):
Debt-Equity Ratio – “Debt-Equity Ratio measures the relationship between long-term debt and equity. If debt component of the total long-term funds employed is small, outsiders feel more secure. From security point of view, capital structure with less debt and more equity is considered favourable as it reduces the chances of bankruptcy. Normally, it is considered to be safe if debt equity ratio is 2 : 1. However, it may vary from industry to industry.”

Based on following data related to Ambe limited, Jaipur, Answer question.

	₹
Revenue from operations	8,40,000
Cost of revenue from operations	4,20,000
Selling Expenses	80,000
Administrative Expenses	40,000
Equity share capital	1,00,000
8% preference share capital	50,000
10% debentures	1,00,000
Profit after Tax	1,74,000
Tax Rate	40%

Identify the debt-equity ratio that is normally considered safe.

Answer & explanation

Correct answer: option 2

The correct answer is Option (2) → 2 : 1

The debt-equity ratio compares long-term debt with shareholders' funds. A debt-equity ratio of 2 : 1 is normally considered safe, though it varies from industry to industry.

For Ambe Limited: debt (10% debentures) = ₹1,00,000; equity (equity + preference share capital) = ₹1,50,000; ratio = 1,00,000 : 1,50,000 = 2 : 3, well within the safe limit.