Shehzad Khan

BsBF-8th

Roll No. 45

Submitted to

Mr. Qazi Sikandar Hayat

Capital structure Policy of Shell Co
The Company’s prime objective when managing capital is to safeguard its ability to continue as a going
concern, maintain healthy capital ratios, strong credit rating and optimal capital structure in order to
ensure ample availability of finance for its existing and potential investment projects, to maximize
shareholder value and reduce the cost of capital.

In order to maintain or adjust the capital structure, the Company may adjust the amount of dividends
paid to shareholders, issue new shares or sell assets to reduce debt.

Consistent with others in the industry, the Company monitors capital based on the debt ratio. This ratio
is calculated as net debt divided by total capital. Net debt is calculated as total borrowings less cash and
bank balances.

During the year, the Company’s strategy was to minimize leveraged gearing. The Company finances its
operations through equity, borrowings, and management of its working capital with a view to
maintaining an appropriate mix between various sources of finance to minimize risk.

Debt Ratio:

The debt ratio indicates the firms’ long-term debt paying ability. The debt ratio indicates the
percentage of assets financed by creditors, and it helps to determine how well creditors are
protected in case of insolvency.

Formula for Debt Ratio:

The debt ratio is computed as follows,

Total Liabilities
Debt Ratio =
Total Assets

Table:

2018 2019
Total Liabilities 51,883,874 42,763,246
Total Assets 49,116,568 56,175,007
Debt Ratio 1.06 0.76

Interpretation
A ratio above 0.6 is generally considered to be a poor ratio, since there's a risk that the business
will not generate enough cash flow to service its debt, and Shell Co Ltd has Total Debt to Total
Assets ratio of 1.06% for year 2018 and for 0.76 2019.

Debt/Equity Ratio:

The Debt/Equity ratio is another computation that determines the entity long term debt paying
ability. From the prospective of long-term debt paying ability, the lower this ratio is, better the
company debt position.

Formula for Debt/Equity Ratio:

The computation compares the total debt with the shareholder equities.

Total Liability
Debt/Equity Ratio =
Shareholders Equity

Table:

2018 2019
Total Liabilities 51,883,874 42,763,246
Total Equity 6,353,322 4,291,133
Debt-Equity Ratio 8.17 9.97

Interpretation
If the debt to equity ratio is lower than 1, then that means its assets are more funded by
equity. The equity ratio of Shell Co Ltd is 8.17 for year 2018 and 9.97 for 2019 that means its
assets are more funded by liabilities.

Debt to Tangible Net Worth:

The debt to tangible net worth ratio also determines the equity’s long-term debt paying ability.
The debt to tangible net worth is a more conservative ratio than either the debt ratio or the
debt/equity ratio. It eliminates intangible assets, such as goodwill, trademarks, patents, and
patents, because they do not provide resources to pay creditors a conservative position.

Formula for Debt to Tangible Net Worth:

Compute the debt to tangible net worth ratio as follows:

Total Liabilities
Debt to Tangible Net Worth = Shareholders Equity−Intangible Assets

Table:
2018 2019
Total Liabilities 51,883,874 42,763,246
Total Equity 6,353,322 4,291,133
Intangible Assets 14,709 11,557

Debt to Tangible Net Worth 8.19 9.99