Day 4 Fundamental Investing
With yesterday's ratio, we have now completed the most important liquidity ratios.
Next, we move on to solvency ratios. The first solvency ratio is Debt/Equity Ratio (D/E).
What is it?
The debt to equity ratio is a financial, liquidity ratio that compares a company’s total debt to total equity. The debt to equity ratio shows the percentage of company financing that comes from creditors and investors. A higher debt to equity ratio indicates that more creditor financing (bank loans) is used than investor financing (shareholders).
How to calculate it?
Here's an image for the same:
What's its significance?
A lower debt to equity ratio usually implies a more financially stable business. Companies with a higher debt to equity ratio are considered riskier to creditors and investors than companies with a lower ratio. Unlike equity financing, the debt must be repaid to the lender. Since debt financing also requires debt servicing or regular interest payments, debt can be a far more expensive form of financing than equity financing. Companies leveraging large amounts of debt might not be able to make the payments.
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