Debt and Bankruptcy

Investing and Financial Markets

# What is ideal debt to equity ratio?

###### Wiki User

###### 2009-11-27 03:33:51

- Debt-to-Equity ratio compares the Total Liabilities to the
Total Equity of the company. It paints a useful picture of the

company's liability position and is frequently used.

*Debt-to-Equity Ratio = Total Liabilities / Shareholder's**Equity* - Both the Total Liabilities and Shareholder's Equity are found
on the Balance Sheet.

- When this number is less than 1, it indicates that the
company's creditors have less money in the company than its equity

holders. That, typically, would be an

threshold*ideal*to be below.

- It's common for large, well-established companies to have
Debt-to-Equity ratios exceeding 1. For instance, GE carries a

Debt-to-Equity ratio of around 4.4 (440%), and IBM around

(1.3)130%.

## Related Questions

###### Asked in Business Accounting and Bookkeeping, Investing and Financial Markets

### Breckenridge Ski Company has total assets of 422235811 and a debt ratio of 29.5 percent Calculate the companys debt-to-equity ratio and the equity multiplier?

What is given is: total assets = $422,235,811 Debt ratio = 29.5%
Find: debt-to-equity ratio Equity multiplier Debt-to-equity ratio =
total debt / total equity Total debt ratio = total debt / total
assets Total debt = total debt ratio x total assets = 0.295 x
422,235,811 = 124,559,564.2 Total assets = total equity + total
debt Total equity = total assets - total debt = 422,235,811 -
124,559,564.2 = 297,676,246.8 Debt-to-equity ratio = total debt /
total equity = 124,559,564.2 / 297,676,246.8 = 0.4184 Equity
multiplier = total assets / total equity = 422,235,811 /
297,676,246.8 = 1.418

###### Asked in Business Finance

### What are the possible ways to increase debt-equity ratio?

The debt-to-equity ratio is a very simply calculation. Just
divide a company's outstanding debt at a given date (usually
quarter-end or year-end) by the company's equity on that same date.
So, to increase this ratio, you would need to either increase the
debt balance (i.e. borrow more) or decrease the equity balance
(i.e. pay a dividend). Keep in mind, while increasing the
debt-to-equity ratio will increase the ROE (return on equity) for a
company, it also increases risk. Additionally, most banks include
covenants in their loans that limit the debt-to-equity ratio for
their customers (thereby making certain that the company has an
equity "cushion" should an economic downturn occur).

###### Asked in Debt and Bankruptcy, Ratios (mathematical)

### Solve for debt equity ratio with debt ratio of 43?

For a company, the debt ratio indicates the relationship between
capital supplied by outsiders and capital supplied by shareholders.
Often the debt ratio is computed as total debt (both current and
long-term) divided by total assets. Thus if a company has $50,000
in debt and assets of $100,000, its debt ratio is 50%. The debt
ratio is also calculated as total debt/shareholders' equity,
long-term debt/shareholders' equity, and in other ways. However
computed, the debt ratio provides insight into the firm's capital
structure and will vary across industries. A low debt ratio isn't
necessarily best: If a company can earn a greater return on debt
than its cost, the firm should borrow more and raise its debt ratio
-- provided the debt burden won't be crushing when business slows.
Turning to consumers, the debt ratio is often shorthand for the
"debt to income" ratio, i.e., an individual's monthly minimum debt
payments divided by monthly gross income. The debt ratio is
monitored by credit card companies and determines the consumer's
ability to obtain additional credit

###### Asked in Definitions, Currency Trading, Capital Equipment Leasing, Investment Banking

### What is financial leverage ratio?

Leverage is using debt to finance investments.
Leverage ratio is the ratio between the size of the debt and some
metric for the value of the investment.
There are several financial leverage ratios, for companies the
debt-to-equity ratio is the most common one: Total debt /
shareholder equity.
As an example we can use the debt-to-equity ratio for a home with a
market value of $110,000 and a mortgage of $100,000: Debt is
$100,000 and equity is $10,000 (market value minus debt), giving a
debt-to-equity ratio of 100,000/10,000 = 10.
The general idea is that very low leverage means that a company
isn't growing as quickly as it could, while a very high leverage
means that a company is vulnerable to temporary setbacks in sales
or increases in interest rate.
What is considered a 'good' ratio varies quite a bit between
different types of business.
See also related links.