Just last week, my parents expressed a desire to see a concert of a popular Bollywood singer. My father knew one of the sponsors but opted to go to the ticket counter and take tickets himself.
Me: Why did you not ask XYZ uncle for tickets? We could have gotten them easily.
Him: Why ask for any such favour? I want to be debt-free*.
Me: But you are still lending some when people ask you for favours.
Him: That’s fine. I can live with that, but not with the burden of asking a favour.
Me: It’s befitting that you are a doctor. In any other profession, you would have been eaten raw.
And this conversation got me thinking how financial ratios are true for human beings (souls) as well. Let me illustrate via two ratios:
Debt-Equity ratio (D/E) = Debt/Equity ….(a measure of leverage)
Return on Equity (ROE)= Profits/Equity ….(a measure of profitability)
Now, higher D/E ratio leads to higher ROE. People interested in Finance can check out a crude explanation here.
This means that the higher debt you take, the more profitable you will be. It’s real life translation is that you can always achieve more material goals easily by asking more favours. This, from what I have heard, is astonishingly true in the corporate world – right from your first salary hike to lobbying the minister across the table.
Now, using higher leverage is how the big banks were showing huge profits before 2008 financial crisis. We all know what happened to Lehman Brothers after that. Similarly, high debts might lead to an existential crisis in real life or a valid doubt on the reasons of your own success. I, however, trust the quixotic gene I inherited from my father to save me from any such event.
So, if you are doing really well, the question is – how leveraged are you?
* – The debt in this case is not monetary debt. In Hindu mythology, asking a favour means a debt on your soul. In some texts, this debt is also cited as a reason for reincarnation.