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A company's debt-to-equity ratio (D/E) is a financial ratio indicating the relative proportion of shareholders' equity and debt used to finance the company's assets. [1] Closely related to leveraging , the ratio is also known as risk , gearing or leverage .
Companies also use debt in many ways for capital expenditures and other business investments produced in their assets, "leveraging" the return on their equity. This leverage, the proportion of debt to equity, is considered paramount in determining the riskiness of an investment, under the notion that it becomes more risking under more debt.
A company's debt-to-capital ratio or D/C ratio is the ratio of its total debt to its total capital, its debt and equity combined. The ratio measures a company's capital structure , financial solvency , and degree of leverage , at a particular point in time. [ 1 ]
is the debt-to-equity ratio. A higher debt-to-equity ratio leads to a higher required return on equity, because of the higher risk involved for equity-holders in a company with debt. The formula is derived from the theory of weighted average cost of capital (WACC).
Up to a certain point, the use of debt (such as bonds or bank loans) in a company's capital structure is beneficial. When debt is a portion of a firm's capital structure, it permits the company to achieve greater earnings per share than would be possible by issuing equity.
If the shareholders have introduced only a nominal amount of paid-up share capital, then the company has lower financial reserves with which to meet its obligations.If all or most of the company's capital comes from debt, which (unlike equity) needs to be serviced, and ultimately repaid, it means that the providers of capital are ultimately competing with the company's trade creditors for the ...
The debt ratio or debt to assets ratio is a financial ratio which indicates the percentage of a company's assets which are funded by debt. [1] It is measured as the ratio of total debt to total assets , which is also equal to the ratio of total liabilities and total assets:
Federal debt to Federal revenue ratio. Financial ratios quantify many aspects of a business and are an integral part of the financial statement analysis.Financial ratios are categorized according to the financial aspect of the business which the ratio measures.