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What is Debt to Equity Ratio?
The Debt to Equity (D/E) Ratio is a financial measures the proportion to the Common Stock Equity and debt used to finance a company’s assets.
A high Debt to Equity ratio indicates generally that a company has been aggressive in financing its growth with debt. If there is allot of debt issued to finance the company, the company could potentially generate more earnings than it would have without the extra issued debt. If the interest payed on the issued debt is not greater than the extra earnings made from this debt, the the shareholder will benefit from those extra earnings. However if the interest payments are higher then the extra earnings they company is destroying shareholders money. The company can also get bankrupt when it can not longer afford the interest payments.
The Debt to Equity Ratio differs per industry. For example a steel factory requires allot of capital to invest in the factory, while a computer software developer don’t. So you can not compare those two D/E Ratio’s which each other.
How to calculate the Debt to Equity Ratio?
Debt to Equity (D/E) Ratio = Total Liabilities / Common Stock Equity