Updated on November 19, 2023Table of Contents
The debt-to-equity ratio is a measure of capital structure used to gauge the relative proportion of debt and equity financing used by a company to finance its assets. It compares the company’s total liabilities to its total shareholders‘ equity. The debt-to-equity ratio is expressed as a percentage and is calculated as follows:
Debt-to-Equity Ratio = Total Liabilities / (Total Liabilities + Total Shareholder’s Equity)
Total liabilities include all of the company’s debts and other obligations that are owed to creditors, such as accounts payable, long-term debt, and current liabilities. Total shareholders’ equity includes the company’s common stock and retained earnings.
The debt-to-equity ratio is a valuable metric for investors and creditors to assess the financial health and risk profile of a company. It is important to consider the industry context and other factors when interpreting the debt-to-equity ratio.
What is a good debt-to-equity ratio?
A good debt-to-equity ratio typically ranges between 0.5 and 1.0, indicating a balanced mix of debt and equity, though acceptable ratios can vary by industry.
Is a debt-to-equity ratio below 1 good?
Yes, a debt-to-equity ratio below 1 usually indicates that a company has more equity than debt, which is often seen as financially stable and less risky.
What does a debt-to-equity ratio of 1.5 mean?
A debt-to-equity ratio of 1.5 means the company has 1.5 units of debt for every unit of equity, showing it uses a moderate level of debt financing, which may be good for growth but increases risk.
What does a 0.5 debt-to-equity ratio mean?
A 0.5 debt-to-equity ratio means the company has half as much debt as equity, indicating low reliance on debt financing, which is generally considered financially conservative.
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