May, 2012 4:58 AM
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Debt to equity
The Debt to Equity Ratio tells you the percentage of the company’s capital that came from creditors versus shareholders. The formula for calculating the Debt to Equity Ratio is as follows:
Total Liabilities / Shareholder Equity
The Debt to Equity Ratio is a measure of how much a company relies on “other people’s money” to operate versus how much it relies on its own money – shareholder equity.
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Lower numbers here mean a company is using less leverage, or debt, to operate.
Although larger companies can generally handle larger debt loads, the D/E Ratio taken in isolation doesn’t tell you anything about possible trends in the use of debt. Has the company’s debt been steadily increasing over the past years?
If so, when you couple a relatively high debt with a relatively low liquidity, you could be looking at trouble if business conditions take a dramatic turn for the worse..RELATED TERMS
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