Debt-To-Equity Ratio; Indicate how a company/business is financing its operations (ie through debt vs wholly-owned funds (equity/capital)

Formula: Total Liability / Total share equity                       

Importance:  Determines the financial risk of a company. A ratio greater than 1 indicates that a significant portion of the assets are funded with debt and that the company has a higher default risk. Therefore, the lower the ratio, the safer the company.

Note:

1. Total libilities includes all short/long  term loans + all other fixed payment (if any). some examples are term loan, hire purchase etc
2. Usually used by lenders (eg banks or creditors) to assess your “credit ratings”. You can use this to decide how long/credit limit to be given to your customers as well. Which means you get to see your customer’s account… yay!
3. From shareholders’ perspective, those with low ratio means a lower probability of bankruptcy in the event of an economic downturn (like current Covid-19).
4. A company with a higher ratio than its industry average may have difficulty securing additional funding from either source.

You probably heard of “Gearing ratio” or “how is your Company’s Gearing” or “ how is your Company being leveraged?” That will be our sharing for next time:)