- Debt to Equity Ratio

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By PATH by Simplex Support Team

updated 7 months ago

Create Data Mash Calculation with this Formula:

Total Liabilities / Total Equity

Definition:

The debt to equity ratio measures the riskiness of a company's financial structure by comparing its total debt to its total equity. The ratio reveals the relative proportions of debt and equity financing that a business employs. It is closely monitored by lenders and creditors, since it can provide early warning that an organization is so overwhelmed by debt that it is unable to meet its payment obligations.

This is also a funding issue. For example, the owners of a business may not want to contribute any more cash to the company, so they acquire more debt to address the cash shortfall. Or, a company may use debt to buy back shares, thereby increasing the return on investment to the remaining shareholders.

TIP: What does a Low Debt mean?

A lower debt to equity ratio usually implies a more financially stable business. It also means that the investors believe that the company is performing well and are reinvesting in the business operation to ensure continued growth and success. 

A company in this position can leverage debt to rapidly grow their business.

TIP: What does a High Debt mean?

A higher debt to equity ratio as risky because it shows that the investors haven't funded the operations as much as creditors have. In other words, investors don't have as much skin in the game.

It could mean that investors don't want to fund the business operation because of poor performance. Poor performance may be the reason the company is seeking debt financing.


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