Debt/equity ratio = Long-term debt / Common stock
The greater a company's leverage, the higher the ratio. Generally, companies with higher ratios are thought to be more risky because they have more liabilities and less equity. See also: Long-Term Debt/Capitalization Ratio.
The ratio of mortgage debt to the owner's equity in the property.Typical home mortgage lenders require a debt/equity ratio of 80 percent—meaning they will loan up to 80 percent of the value of the home.Higher ratios can be obtained by purchasing private mortgage insurance. Commercial lenders have varying requirements depending on particular market circumstances at the time.
What Does Debt/Equity Ratio Mean?
A measure of a company's financial leverage calculated by dividing its total liabilities by its 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.
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 generate more earnings than it would have without outside financing. If this increases earnings by a greater amount than the debt cost (interest), the shareholders benefit as more earnings are being spread among the same amount of shareholders. However, when the cost of the debt financing outweighs the return that the company generates on the debt, this could spell trouble for the company, leading to possible 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 automobiles tend to have a debt/equity ratio above 2, whereas personal computer companies have a debt/equity ratio under 0.5.
Related Terms:
• Acid-Test Ratio
• Debt-to-Capital Ratio
• Leverage
• Long-Term Debt
• Shareholders' Equity
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