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The Debt-to-Equity Ratio is a financial metric widely used by investors to measure how much a business relies on debt to finance its operations rather than its own funds. Calculating the debt-to-equity ratio is very simple; investors simply need to open the balance sheet and divide total liabilities by total shareholder equity.
Interpreting the Debt-to-Equity Ratio
1. A Debt-to-Equity Ratio = 1 (100%) indicates a company's financial health, and investor funds are secure. Therefore, if the Debt-to-Equity Ratio is <1, the company's finances are considered stable.
2. A Debt-to-Equity Ratio >1 means the company's debt is primarily accountable for trade payables, and investor funds are secure.
However, if the debt is primarily comprised of bank loans and bonds, investors should be cautious.
3. A Debt-to-Equity Ratio >2 means the company's financial condition is often considered vulnerable to various risks.
Interpreting the Debt-to-Equity Ratio
1. A Debt-to-Equity Ratio = 1 (100%) indicates a company's financial health, and investor funds are secure. Therefore, if the Debt-to-Equity Ratio is <1, the company's finances are considered stable.
2. A Debt-to-Equity Ratio >1 means the company's debt is primarily accountable for trade payables, and investor funds are secure.
However, if the debt is primarily comprised of bank loans and bonds, investors should be cautious.
3. A Debt-to-Equity Ratio >2 means the company's financial condition is often considered vulnerable to various risks.