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Debt-to-equity ratio which is low say 01 would suggest that the company is not fully utilizing the cheaper source of finance ie.
Debt to equity ratio analysis interpretation. Introduction to Interpretation of Debt to Equity Ratio In this article we will discuss the Interpretation of Debt to Equity RatioThe debt to Equity ratio helps us to understand the financial leverage of the company. Debt Equity ratio is the ratio between the Total Debt of the company to the Total Equity. Understanding the Debt to Equity Ratio The debt to equity ratio shows a companys debt as a percentage of its shareholders equity.
The debt to equity ratio is the most important of all capital adequacy ratios. If the debt to equity ratio is less than 10 then the firm is generally less risky than firms whose debt to equity ratio is greater than 10. The debt-to-equity DE ratio is a metric that provides insight into a companys use of debt.
It helps in understanding the likelihood of the stock to perform better relative to others. Another major difference between the debt to equity ratio and the debt ratio is the fact that debt to equity ratio uses only long term debt while debt ratio uses total debt. It is seen by investors and analysts worldwide as the true measure of riskiness of the firm.
A higher ratio means the company is taking on more debt. This ratio is often quoted in the financials of the company as well as in discussions pertaining to the financial health of the company in TV shows newspapers etc. It is expressed in term of long-term debt and equity.
The ratio measures the proportion of assets that are funded by. Companies with a higher debt to equity ratio are considered more risky to creditors and investors than companies with a lower ratio. In simple terms its a way to examine how a company uses different sources of funding to pay for its operations.
For example if a company is too dependent on debt then the company is too risky to invest in. It means that the business uses more of debt to fuel its funding. The goal of this ratio is to determine how much leverage the company is taking.
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