Stock Picking
I read from many websites that explain the criteria for selecting shariah compliant stocks that the maximum debt ratio a company can have is up to 1/3. I am wondering what the reason for this number is. Why is it limited only to that much and what shar’i evidence do they quote for basing that number off of?
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Answers
Technology expert.
Because debt is inherently risky, lenders and investors tend to favor businesses with lower D/E ratios. For lenders, a low ratio means a lower risk of loan default. For shareholders, it means a decreased probability of bankruptcy in the event of an economic downturn. A company with a higher ratio than its industry average, therefore, may have difficulty securing additional funding from either source.
Answered about 4 years ago