What Is the Average D/E Ratio in the Food and Beverage Sector?
The food and beverage sector includes diverse groups of companies specializing in producing different foods and beverages such as specialty health foods, meat products, eggs, soft drinks, beer, and liquor. To determine whether a stock in this sector is appropriate to purchase for a portfolio, many investors look to the company's long-term debt-to-equity (D/E) ratio.
- The D/E ratio is an important metric used in corporate finance and reflects the ability of shareholder equity to cover all outstanding debts in the event of a business downturn.
- The average d/e ratio of the industry could be a misleading metric because the distribution of the D/E ratios within the industry is highly skewed.
- The D/E ratio is calculated by dividing a company’s total liabilities by its shareholder equity.
Understanding the Average D/E Ratio in the Food and Beverage Sector
The D/E ratio is most often used to gauge the extent to which a company is taking on debt as a means of leveraging its assets. A high D/E ratio is often associated with high risk; it means that a company has been aggressive in financing its growth with debt.
If a lot of debt is used to finance growth, a company could potentially generate more earnings than it would have without that financing. If leverage increases earnings by a greater amount than the debt’s cost (interest), then shareholders should expect to benefit. However, if the cost of debt financing outweighs the increased income generated, share values may decline. The cost of debt can vary with market conditions.
Below is the D/E ratio of three of the largest food and beverage companies as of June 2021:
|D/E Ratios of the Top 3 Food and Beverage Companies|
The average D/E ratio of an industry could be a misleading metric if the distribution of the D/E ratios within an industry is highly skewed. Since there are a few large outliers among the food and beverage industry, the average D/E ratio represents a misleading relative value metric. Instead, analysts often calculate other measures such as the median to assess the typical D/E ratio within the food and beverage sector.