The debt-to-equity ratio is calculated by dividing the total liabilities of a company by the shareholder's equity. These numbers are readily available on the company's balance sheet or the financial statements. This ratio is also used to understand the financial leverage of a company. It is a very important indicator to measure the finance of a company. It is used to measure the degree to which a company is capable of financing all its operations through debt versus the funds owned by it. To be very particular, it is the capability of a shareholder's equity to take care of all the outstanding debts when there is a downturn in the business. It is a kind of gearing ratio. Now, what if there is a debt to equity ratio calculator?
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The debt to equity ratio calculator provides insight and understanding of the financial status of a company. When you decide to invest in a company, a higher debt to equity ratio means that the investment could be riskier. Thus emerges, the need for a calculator, which helps in understanding where and when to invest. Often the interest rates are rising. If the ratio is greater than 50%, then it is always recommended to reconsider investing to make sure there are no liquidity issues. A higher ratio indicates to the investors and the lenders that the company is at a higher risk. It may also have the chances of defaulting on a debt that is owed.
A calculator that helps compute the debt to equity ratio is a great way of estimating where a company stands financially. The Debt-to-Equity Ratio or D/E is calculated using the Debt-to-Equity formula:
The information required for calculating the D/E ratio can be found on the balance sheet of a company. Various categories in the balance sheet may contain individual accounts that do not fall under debt or equity in the traditional sense of the book value or loan of an asset. This ratio can be affected by earnings or losses, pension plan adjustments and other intangible assets.
A company's leverage is often affected by a number of factors. Due to the various kinds of ambiguities, analysts and investors will change the D/E ratio to make it more useful and easier to compare between various stocks. The analysis of the D/E ratio can also be improved by including the profit performance, short-term leverage ratios and growth expectations.
A figure of 1 to 1.5 is considered a good debt to equity ratio. However, the ideal debt to equity ratio also changes depending on the industry because some of the industries are dependent on more debt financing than others. There are certain capital-intensive industries like the manufacturing and financial industries, which often have much higher ratios. These high ratios can sometimes be greater than 2 as well.
A high debt to equity ratio means the business is using debts to finance its requirements. The companies that invest huge amounts of money in operations and assets have a higher debt to equity ratio. For the investors and lenders, this high ratio will point towards investment with greater risks because the business might not be able to generate enough revenues to pay back the debts.
The debt to equity ratio for some companies is low as well. Some companies are lucky enough to have it close to 0. This means that the business is not dependent on debt to finance its operations. Often the investors do not invest in such companies as the business has still not realized the profits and values it could gain by borrowing and increasing operations.
Creditors also consider a higher debt to equity ratio as risky because it indicates that the investors have not invested funds in the operations as the creditors have. In other words, the investors and creditors do not place the same importance level on certain aspects of the business or business operations as a whole. This typically results in the investors being reluctant to fund the operations of the business as the company is not showing the desirable levels of performance and/or commitment.
Estimating the debt-to-equity ratio is of great importance to investors but is a tedious calculation to do manually. That's why the use of a good online calculator is widespread in this regard. You just need to input the value of total liabilities and shareholders' equity to get the ratio instantly. Try the debt-to-equity ratio calculator by iCalculator whenever you want to come to form a decision regarding risks involved in an investment.
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