Tuesday, 4 June 2013

The Debt/Equity Ratio: Solvency on the balance sheet or personal finances

The debt/equity ratio is a a measure of a company's financial leverage calculated by dividing its total liabilities by stockholders' equity. The name says it all. It indicates what proportion of equity and debt the company is using to finance its assets.

Total Liabilities/Shareholders Equity

Note: Sometimes only interest-bearing, long-term debt is used instead of total liabilities in the calculation.

Also known as the Personal Debt/Equity Ratio, this ratio can be applied to personal financial statements as well as corporate ones.

A high debt/equity ratio generally means that a company has been aggressive in financing its growth with debt. This can result in volatile earnings as a result of the additional interest expense.

This can be used in stock picking strategies, which will come later in the series of posts. 

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