What is Debt to Equity Ratio?

What is Debt to Equity Ratio? Debt to Equity Ratio

Debt to Equity Ratio, also known as Debt to Equity Ratio in English, is an important indicator of a company's financial leverage. It is a measure of the ratio of a company's total debt to equity financing.

The debt-to-equity ratio, also known as the “Risk Ratio” or “Gearing”, is a leverage ratio that evaluates the risks existing in the financial structure of a listed company by comparing its total debt (Total Debt) to its shareholders’ equity (Shareholders’ Equity).

In general, the smaller a company's debt-to-equity ratio, the lower its financial leverage and its better financial position. When the debt-to-equity ratio is high, it means that the company's capital structure has a higher proportion of capital obtained through debt.

On the contrary, if the debt-to-equity ratio is low, it means that the company's capital structure has a high proportion of capital obtained through stock sales. Company management and investors, as well as bank lenders, can use this ratio to see the relative proportions of debt and equity financing used by the company.

Typically, lenders and creditors pay more attention to the debt-to-equity ratio because it can provide an early warning of financial risk, i.e., the likelihood that a company will be unable to meet its payment obligations due to being overwhelmed by debt. Note: The "debt" we use here is Debt in English, which is different from the company's "liability".

A company's "liabilities" include all debt, plus other short-term and long-term liabilities, such as accounts payable, accounts received in advance, tax liabilities, etc. In addition, if the company has set up preferred shares (Preferred Equity), due to the special attributes of preferred shares, there is a certain compulsion to pay dividends.

Therefore, when calculating, some analysts will calculate preferred shares as debt instead of shareholder equity. Different preferred share calculation methods will have a great impact on the calculation results.

For example: A company has $500,000 of preferred stock, $1,000,000 of total debt excluding preferred stock, and $1.2 million of total stockholders' equity excluding preferred stock.

If preferred stock is counted as debt, the debt-to-equity ratio is: Debt to Equity Ratio = ($500,000 + $1,000,000) / $1,200,000 = 1.25 If preferred stock is included in total shareholders' equity, the debt-to-equity ratio is: Debt to Equity Ratio = $1,000,000 / ($500,000 + $1,200,000) = 0.57 In addition, some analysts will only use long-term debt in their

calculations, because compared with highly liquid short-term debt, long-term debt can more truly reflect the company's debt level.

The calculation formula is: Debt to Equity Ratio = Long-Term Debt / Total Shareholders’ Equity Calculate Apple's debt-to-equity ratio This section calculates Apple's debt-to-equity ratio by using data from Apple's latest 10-K financial report: AAPL's latest financial report contains the following balance sheet and shareholders' equity statement as follows:

Balance Sheets: Statements of Shareholders’ Equity: As can be seen from the shareholders' equity statement, Apple has no preferred shares, so in the calculation of the debt-to-equity ratio, the total shareholders' equity is $63,090 M.

Use the basic calculation formula: Debt to Equity Ratio = Total Debt / Total Shareholders’ Equity = $287,912 M / $63,090 M = 4.56 Total debt after calculating total assets and total shareholders' equity is calculated as:

Debt to Equity Ratio = (Assets – Equities) / Total Shareholders’ Equity = ($351,002 M – $63,090 M) / $63,090 M In other words, Apple records all accrued liabilities in its financial statements. Use long-term debt to calculate debt-to-equity ratio: = $162,431 / $63,090 M = 2.58 What investment guidance does the debt-to-equity ratio have?

If the debt-to-equity ratio is 1.5, it means that the company has $1.50 of debt for every $1 of equity. Secondly, if the debt-to-equity ratio is negative, it means that shareholders' equity is negative, which means that the company's current debt is greater than its assets.

This is a very dangerous signal for both the company and investors, indicating that the company may be facing the risk of bankruptcy. What does the debt-to-equity ratio mean? Under normal circumstances, a low debt-to-equity ratio means that the company's operating model is very mature and it has accumulated a large amount of funds.

However, for shareholders, it may be considered that the company has not fully utilized funds to further develop the company's scale. A higher debt-to-equity ratio indicates that the company is using leverage when using shareholder investment. If the company is growing rapidly, it means that the company is running smoothly.

Under leverage, shareholders will get more returns on their investment. But if this situation occurs during the company's recession period, it means that the company's operations may be subject to greater risks. It is generally believed that a debt-to-equity ratio of around 2 or 2.5 is a relatively good number.

If it is higher than 7, it means that the company's debt level is high, which will generally arouse vigilance as a lender. What are the factors that affect debt-to-equity ratio? The first is the company's shareholder model.

If the company sets up preferred shares, as mentioned in the calculation method above, the preferred shares will be included in debt or shareholder equity due to analysts' subjective factors. When preferred stock is included in different categories, it has a greater impact on the final debt-to-equity ratio.

Typically, as a preferred stock holder, the preferred stock will be included in the total stockholders' equity, while as a non-preferred stock holder, the preferred stock will be included in the company's total debt. Secondly, different types of companies usually have large differences in debt-to-equity ratios due to different operating models.

For example, companies with relatively stable revenue and the ability to borrow funds at lower costs, such as public utility companies and consumer staples companies, usually have higher debt-to-equity ratios.

Next, using long-term debt to calculate the debt-to-equity ratio can better reflect the ratio of a company's overall debt to shareholders' equity, because short-term debt is very liquid and cannot accurately reflect the purpose of calculating the debt-to-equity ratio. More company value analysis What are minority interests?

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Enterprise Multiple What are preferred shares? Preferred Stock What is operating leverage? Degree of Operating Leverage What is debt service ratio? Debt Service Coverage Ratio

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