Understanding Short-Term Debt to Equity Ratio

Short-Term Debt to Equity Ratio measures the company's ability to meet its short-term debt obligations by shareholders' equity. Short-Term Debts are current liabilities of the company. Some short-term debts are wages, current taxes, accounts payable, short-term loans, etc. It is computed by dividing short-term debts by total shareholders' equity.

The formula to derive Short-Term Debt to Equity Ratio



Short-term debts - These are a company's debt obligations that are due to be paid within one year. Some short-term debts are current taxes, short-term loans, etc. Short-term debts are found in the liabilities section of the company's Balance Sheet.

Total Shareholders Fund - It refers to the equity amount which belongs to the company's shareholders or owners' claim on the assets after settlement of debts. It is also known as Shareholders equity, and it is found in the Balance Sheet.

Example of Short-term debt to Equity Ratio: For the financial year, Aavas Financiers reported short-term debt as Rs.1003.95 Cr. and total equity as Rs. 2400.81 Cr.
The value as per the formula (Short-Term Debts / Total Equity) is calculated as (1003.95 / 2400.81) = 0.42

---

Key Highlights

The short-term debt to equity indicates whether the company can meet its short-term debt obligation using shareholders' equity or not.

It is calculated as short-term debts divided by total shareholder's equity.

The short-term debt to equity ratio below one is considered good for most industries.

Compared companies operate in the same industry, as short-term debt to equity ratio differs from one industry to another.

---

While looking at the Short-Term Debt to Equity Ratio, the following points should also take into consideration:

The ideal Short term debt to equity ratio is 1. A low ratio indicates that the company has more shareholders' equity compared to debts.

A high short-term debt to equity ratio indicates that the company has taken a lot of

The negative short-term debt to equity ratio means the company's shareholder's fund is negative and has less assets than its liabilities.

---

How to use the Short-Term Debt to Equity Ratio effectively

Investors should look for short-term debt to equity ratio below 1.

Compared companies operate in the same industry, as short-term debt to equity ratio differs from one industry to another.

Using the current ratio with the short-term debt to equity ratio will give a better analysis of the solvency position of the company and whether the company can cover its short-term obligation or not.

For better analysis, look at other related financial metrics with short-term debt to equity ratio such as Debt to Equity Ratio, Current Ratio, Quick Ratio, etc.,

---