Debt – Equity Ratio

What is Debt/Equity ratio ?

The debt-equity ratio is essentially the measure of a company’s financial leverage assessed by dividing the total liabilities by stockholders’ equity. Therefore, it denotes what proportion of equity and debt the company is utilizing to finance its assets.

Debt – equity ratio

 

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If the ratio is high, it essentially means that the company has been pretty aggressive in financing its growth with debt. Needless to say, this approach may eventually lead to volatile earnings caused due to additional intentional expenses.
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In case a lot of debt is utilized to finance more operations (high debt to equity), the organization can easily manage to generate more earnings compared to what it would have earned with the outside financing. If this arrangement helps earnings  grow by a greater amount compared to the overall debt cost, then the shareholders make more benefits (because more earnings are being distributed amongst the same number of shareholders).

Edited and Updated 2nd January 2014

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