To determine and measure the solvency and capital structure of a company, the D/E Ratio is used. It indicates how much the company is
leveraged (in debt) by comparing what is owed to what is owned. In other
words it measures a company's ability to borrow and repay money.
The D/E Ratio is
closely watched by creditors and investors, because it reveals
the extent to which company management is willing to fund its operations
with debt, rather than equity. Lenders such as banks are
particularly sensitive about this ratio, since an excessively high ratio
of debt to equity will put their loans at risk of not being repaid.
Possible actions by banks to counteract this problem are the use of
restrictive contracts that force excess cash flow into debt repayment,
restrictions on alternative use of cash, and a requirement for investors
to put more equity into the company themselves.
is fairly simple:
Divide Total Debt (= Total Liabilities)
by Total Equity. Can be multiplied with 100 to get a percentage.
Note that the Debt figure should
include all operating and capital lease payments.
Sometimes only long-term debt is taken
into account in the numerator to look at the long term debt to equity
Comparing the result with industry peers may prove useful.
It is recommended to use this ratio over a period of several years and
additionally take into account WHEN certain repayments are due as this
can make a major difference for the solvency of the company.
Compare with the Debt to Equity Ratio:
Cash Flow from
Dividend Payout Ratio
More management models