Debt/Equity Ratio
 |
Definition of 'Debt/Equity Ratio'A measure of a company's financial leverage calculated by dividing its total liabilities by stockholders' equity. It indicates what proportion of equity and debt the company is using to finance its assets.Note: Sometimes only interest-bearing, long-term debt is used instead of total liabilities in the calculation. Also known as the Personal Debt/Equity Ratio, this ratio can be applied to personal financial statements as well as corporate ones. |
|
Investopedia explains 'Debt/Equity Ratio'A high debt/equity ratio generally means that a company has been aggressive in financing its growth with debt. This can result in volatile earnings as a result of the additional interest expense.If a lot of debt is used to finance increased operations (high debt to equity), the company could potentially generate more earnings than it would have without this outside financing. If this were to increase earnings by a greater amount than the debt cost (interest), then the shareholders benefit as more earnings are being spread among the same amount of shareholders. However, the cost of this debt financing may outweigh the return that the company generates on the debt through investment and business activities and become too much for the company to handle. This can lead to bankruptcy, which would leave shareholders with nothing. The debt/equity ratio also depends on the industry in which the company operates. For example, capital-intensive industries such as auto manufacturing tend to have a debt/equity ratio above 2, while personal computer companies have a debt/equity of under 0.5. To learn how D/E ratios can help value investors, check out our tutorial on Stock-Picking Strategies: Value Investing. |
|
Related Video for 'Debt/Equity Ratio'
|
Related Definitions
Articles Of Interest
-
Evaluating A Company's Capital Structure
Learn to use the composition of debt and equity to evaluate balance sheet strength. -
Are Your Stocks Doomed?
When a company is headed for trouble, the warning signs are usually there. Learn how to spot disaster. -
The Debt To Equity Ratio
The debt to equity ratio identifies companies that are highly leveraged and therefore a higher risk for investors. Find out how this ratio is calculated and how you can use it to evaluate a stock. -
Spotting Companies In Financial Distress
What are the warning signs that a company is struggling - or worse, sinking - financially? Read on to find out. -
Will Corporate Debt Drag Your Stock Down?
Borrowed funds can mean a leg up for companies, or the boot for investors. Find out how to tell the difference. -
Debt Reckoning
Learn about debt ratios and how to use them to assess a company's financial health. You could save a lot of money! -
What is a debt/equity swap?
Occasionally, a company will need to undergo some financial restructuring to better position itself for long term success. One possible way to achieve this goal is to issue a debt/equity or an ... -
Ratio Analysis Tutorial
If you don't know how to evaluate a company's present performance and its possible future performance, you need to learn how to analyze ratios. -
Stop Keeping Up With The Joneses - They're Broke
Conspicuous consumption could be robbing you of future wealth. -
Trading Is Timing
Learn how to make gains even if you don't get in at the right time.
