Dictionary
Dictionary
A | B | C | D | E | F | G | H | I | J | K | L | M | N | O | P | Q | R | S | T | U | V | W | X | Y | Z
Debt to Equity Ratio
Definition
There are several ways to calculate this ratio, but the two most common are: 1) Total firm liabilities divided by total shareholder equity. 2) Total long term debt divided by total shareholder's equity.
Using the term Debt to Equity Ratio :
The first calculation is relevant in a liquidation to demonstrate how much equity is available to cover (or help cushion the blow) to the debt holders. The second calculation refers to leverage -- how much debt the company is utilizing to enhance returns.
Pay Special Attention To :
In either case, too much debt is not a good thing. Be wary of firms that use a very large amount of debt to finance their operations. A moderate amount of debt is fine if prudent as it has tax benefits to the firm; however, too much debt is dangerous. As always, compare the firm you are evaluating to its peers in the industry to understand the normal levels of debt.
Rate this definition:
Related terms
Earnings Per Share (EPS)
