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Debt

The document discusses the debt-to-equity ratio, which is a measure of a company's financial leverage calculated by dividing its total liabilities by its shareholder equity. A ratio of less than one indicates the company is primarily financed by equity, while a ratio greater than one means debt is the primary financing source. Large, established companies often have high debt-to-equity ratios over one, such as GE at 4.4 and IBM at 1.3.

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26 views

Debt

The document discusses the debt-to-equity ratio, which is a measure of a company's financial leverage calculated by dividing its total liabilities by its shareholder equity. A ratio of less than one indicates the company is primarily financed by equity, while a ratio greater than one means debt is the primary financing source. Large, established companies often have high debt-to-equity ratios over one, such as GE at 4.4 and IBM at 1.3.

Uploaded by

Vicky Jamb
Copyright
© Attribution Non-Commercial (BY-NC)
We take content rights seriously. If you suspect this is your content, claim it here.
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Download as DOCX, PDF, TXT or read online on Scribd
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y Debt-to-Equity ratio compares the Total Liabilities to the Total Equity of the company.

It paints a useful picture of the company's liability position and is frequently used. Debt-to-Equity Ratio = Total Liabilities / Shareholder's Equity y Both the Total Liabilities and Shareholder's Equity are found on the Balance Sheet. y When this number is less than 1, it indicates that the company's creditors have less money in the company than its equity holders. That, typically, would be an ideal threshold to be below. y It's common for large, well-established companies to have Debt-to-Equity ratios exceeding 1. For instance, GE carries a Debt-to-Equity ratio of around 4.4 (440%), and IBM around (1.3)130%.

Debt-equity ratio measures how much of equity and how much of debt a company uses to finance its assets. Debt-equity ratio = Total debt / Equity If the debt-equity ratio is less than one, then it means that equity is mainly used to finance operations. However, if the debt-equity ratio is more than one, then it means that debt is mostly used for financing. If the debt-equity ratio is equal to one, then it means that half of financing comes from debt and half from equity. The more debt compared to equity the firm uses in financing its assets, the higher the financial risk and the higher

potential return. Financial risk refers to risk of firm being forced into bankruptcy if the firm does not meet its debt obligations as they come due.

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