Debt to Equity Ratio shows the percentage of the financing of the company which gain from creditor and investors.
What is Debt/Equity Ratio?
Debt/Equity (D/E) ratio is equal to the number of total liabilities of the company divided by the shareholder of the company. For the evaluation of the company’s Leverage, these calculations are used. This ratio is also considered as a balance sheet ratio because on the balance sheet these all are calculated Debut/Equity ratio by the following formula.
Debt to Equity Ratio | Formula | Analysis | Example
It means that both investor and creditor have the same stake in the business assets. A business which is financially stable has the low Debt/Equity ratio.
Those companies which have High debt to Equity ratio are the more risky companies for investor and creditor both as compared to the companies which have low debt to equity ratio.
As Debt repaid to the lander, unlike equity financing. there is the debt servicing or the regular interest payment requirements for the debt financing because of which debt financing is more expensive than the equity financing.
It is in the knowledge of the creditor that high debt to equity ratio is very risky because the investor has not funded the operation as the creditor have.
In simple words, the mean of this is the investor has no interest to funds the company operation if the performance of the company is not good.
If the performance of the company is not good then the company need to seek out extra debt financing.
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