DEBT EQUITY RATIO

 

What is Debt-Equity ratio for ?

 

The Debt-equity ratio reveals if the company has a great amount of debt in its capital structure. On the other hands it aims to consider the financial risk that a company (or a porfolio of companies in an industry) is generating for the economy. 

 

TOTAL LIABILITIES /  SHAREHOLDERS EQUITY

 

An heavily indebtedness of one's company takes normally a greater financial risk of running out of cash in difficult times. In this broad sense, the KPI like company's debt-equity ratio (leverage or financial leverage) can certainly supports the analyst , creditors and investors in assessing the financial riskiness of the company's debt capital structure.

As it is well known large debts mean that borrower has to pay significant pariodic interest rates and principal. So that, the DEBT-EQUITY ratio indicates the entire debt ratio of the company and althoug it can be an interpretation of the financial leverage ratio of a company, it always depends on several other variables, including the ratios of other companies operating in the same competitive arena (sector, segment or comapny's industry) like the degree of access to additional debt financing and the stability of the company's operation.

 

In the analysis of the ROE - Return on Equity it is used like the company's leverage (or financial leverage) which supports the analyst in assessing the financial riskiness of the company's debt capital structure. 

The Debt-Equity ratio is also called "leverage ratio" cause based on a generally corporate finance theory, it measures the company's indebtdness structure itselfanf therefore the financial exposure considering the overall level of debt of the company in percentage terms. As a fact of the matter, its value is the ratio of total liabilities (current liabilities and long term liabilities) divided capital (or net equity). 

 

 

 

 

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