Debt to Equity Ratio – Figuring it Out!
Debt-to-Equity Ratio – Who are You?
When the total liabilities of the firm are divided by total shareholder equity, the result ends up being debt-to-equity ratio. The equity and liabilities can be found in the company’s balance sheet. Precisely, debt-to-equity ratio tells about the financial leverage of the particular company. Also, it is the computation of a degree that tells the capability of shareholder equity to cater all the remaining funds only if the business is on a dip.
The Formula of Debt to Equity Ratio
The debt-to-equity ratio can be calculated by – dividing the total liabilities to total shareholder equity.
Debt/Equity or D/E = Total Liabilities/Total Shareholder Equity
Significance of Debt-to-Equity Ratio
The ratio al-together tells about the debt a company owes relative to the NAV (net asset value) which is the measure of how much a company is taking on debt to leverage assets. NOTE: A high debt-to-equity ratio is not a good sign only if the financial stability of a company is concerned. High debt-to-equity ratio means simply put or high-risk; It somehow indicates that the company has been into the pace of being aggressive in growing by managing all the finances through debt.
However, there are some consequences too. Here:
- If there is an increase in the earnings because of leverage & are greater than debt cost, then, investors are ready for the benefit.
- High potential means a lot of debt; thus, investors should look for dividends.
- There will be a decline in share price only if the debt cost is more than the generated income.
Note: The debt cost is relative to the movement of the market. Therefore, the possibility of judging the profit won’t be accurate.
Major Takeaways to Care. Take a look:
- High leverage indicates high-risk.
- Debt-to-equity ratio is different for different industries.
- Debt to equity ratio is used by lenders to gauge the overall financial situation of a borrower & make a judgement regarding their re-payment ability.
- Debt-to-equity ratio tells about the financial leverage of the particular company.
*Mutual fund investments are subject to market risks. Please read the scheme information and other related documents carefully before investing.