|
|
| Debt-Equity
Ratio |
= |
Total
Liabilities |
|
Shareholders
Equity |
|
Indicates
what proportion of equity and debt that the company is using to
finance its assets. Sometimes investors only use long term debt
instead of total liabilities for a more stringent test.
Things
to remember |
- A
ratio greater than one means assets are mainly financed
with debt, less than one means equity provides a majority
of the financing.
- If
the ratio is high (financed more with debt) then the company
is in a risky position - especially if interest rates
are on the rise.
|
[Click
on the image(s) above to see the financial statements] |
For
Cory's Tequila Co. |
$3,003 |
=
0.26 |
$11,678 |
|
Share
Capital Analysis
The
shareholder's capital has risen quite a bit if you compare the
balance sheet numbers versus the previous year. Again this could
mean a number of things, there are a couple reasons that this
could have happened. Perhaps they've made acquisitions which were
partially paid for through the issue of stock, or maybe they took
on additional share capital from another firm. Another possible
reason is that they had to issue more shares because they were
strapped for cash. For the most part a rise in share capital is
better than a rise in debt, but too much of a rise could be cause
for alarm.
The
Debt/Equity ratio is certainly far from perfect! A low ratio of
0.26 means that the company is exposing itself to a large amount
of equity. This is certainly better than a high ratio of 2 or more
since this would expose the company to risk such as interest rate
increases and creditor nervousness. One way to improve their situation
would be to issue more debt and use the cash to buyback some of
its outstanding shares. The problem with issuing more and more stock
like Cory's Tequila Co. has done means that outstanding shares become diluted and existing investors
receive a smaller ownership portion with each additional share issued.
Note:
Some prefer to use only "interest bearing long term debt"
instead of total liabilities to get a more precise calculation.
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