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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 .
Economic leverage is volatility of equity divided by volatility of an unlevered investment in the same assets. [11] For example, assume a party buys $100 of a 10-year fixed-rate treasury bond and enters into a fixed-for-floating 10-year interest rate swap to convert the payments to floating rate.
Financial analysts use some form of leverage ratio to quantify the proportion of debt and equity in a company's capital structure, and to make comparisons between companies. Using figures from the balance sheet, the debt-to-capital ratio can be calculated as shown below. [17]
For example, net lease REIT giant Realty Income and industrial REIT giant Prologis both have debt-to-equity ratios over 0.5, while Innovative Industrial's ratio is just 0.15. Low leverage provides ...
In a general sense, a “good” debt-to-assets ratio is 0.4 or lower, as it means a company has a lot of flexibility in terms of its leverage. A ratio of 0.6 or higher can often signal potential ...
The equity investor can increase their projected returns by employing more leverage, creating incentives to maximize the proportion of debt relative to equity (i.e., debt-to-equity ratio).
Our regulatory debt to equity leverage calculated as total debt excluding our SBIC debentures divided by net asset value was 0.64 times, and our regulatory asset coverage was 2.56 times.
As the debt equity ratio (i.e. leverage) increases, there is a trade-off between the interest tax shield and bankruptcy, causing an optimum capital structure, D/E*.The top curve shows the tax shield gains of debt financing, while the bottom curve includes that minus the costs of bankruptcy.