The following figures relate to a company for the past two years - Leaving Cert Business - Question 7 - 2005

For the year 2005, we perform similar calculations:

• Total Debt for 2005: Long-term loans = €140,000
• Total Equity for 2005: Ordinary Share Capital + Retained Earnings = €420,000 + €30,000 = €450,000

Using the formula, we get: $\text{Debt/Equity Ratio} = \frac{\text{Total Debt}}{\text{Total Equity}} = \frac{140,000}{450,000} = 0.31:1$

The trend is Improving. The Debt/Equity ratio has decreased from 0.75:1 in 2004 to 0.31:1 in 2005. A lower ratio indicates that the company is relying less on debt financing relative to equity, which is generally viewed as a positive sign of financial stability.

One possible reason for this improving trend is that the company has been increasing its equity base through retained earnings while reducing its reliance on debt, thereby decreasing financial risk.