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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 .
In finance, leverage, also known as gearing, is any technique involving borrowing funds to buy an investment.. Financial leverage is named after a lever in physics, which amplifies a small input force into a greater output force, because successful leverage amplifies the smaller amounts of money needed for borrowing into large amounts of profit.
Various leverage or gearing ratios are closely watched by financial analysts to assess the amount of debt in a company's capital structure. [4] [5] The Miller and Modigliani theorem argues that the market value of a firm is unaffected by a change in its capital structure. This school of thought is generally viewed as a purely theoretical result ...
An entity's debt-to-equity funding is sometimes expressed as a ratio. For example, a gearing ratio of 1.5:1 means that for every $1 of equity the entity has $1.5 of debt. A high gearing ratio can create problems for: creditors, which bear the solvency risk of the company, and; revenue authorities, which are concerned about excessive interest ...
Financial ratios are categorized according to the financial aspect of the business which the ratio measures. Liquidity ratios measure the availability of cash to pay debt. [2] Activity ratios measure how quickly a firm converts non-cash assets to cash assets. [3] Debt ratios measure the firm's ability to repay long-term debt. [4]
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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] The data to calculate the ratio are found on the balance sheet.
Operating leverage can also be measured in terms of change in operating income for a given change in sales (revenue).. The Degree of Operating Leverage (DOL) can be computed in a number of equivalent ways; one way it is defined as the ratio of the percentage change in Operating Income for a given percentage change in Sales (Brigham 1995, p. 426):