Advantages of Behavioral Finance
The problem with traditional financial theories is that they tend to operate in an ideal world! The underlying assumptions are that the information available is perfect, the investors are capable of interpreting the information. Another assumption is that there is a single right answer which can be mathematically worked out. However, when investors use this […]
Allocating Overheads in Job Order Costing
Tracking direct labor and materials that have been used in a job can be done with a fair degree of precision. That is not the real problem when it comes to costing. The real problem is with allocation of overheads. Usually, they have very little correlation to any specific activity. They are the result of […]
How Ultra Long Term Bonds Work?
In September 2018, Austria became the latest developed country to issue ultra-long-term bonds. As per the deal, Austria raised a total of $4.2 billion which have to be paid back after 100 years! The interest rates on this bond were 2.11%. This deal is being called the largest ever issue of bonds which have a […]
What are Hard Forks?
In the previous article, we learned about the concept of forking in the cryptocurrency universe. We also understood that we can distinguish between soft forks and hard forks. Soft forks do not lead to radical changes in the fundamentals of a cryptocurrency. Hence, the volatility is not said to be that high. This is not […]
What is FinTech and How it Enables Banking and Financial Firms to Leverage Technology
What is FinTech and how is it a Game Changer for BFSI firms? Anybody with a passing curiosity about the world of banking and finance and how technology plays an important role in the operations of such firms would surely have come across the term FinTech. Used in multiple contexts and with a wide variety […]
The debt to equity ratio is the most important of all capital adequacy ratios. It is seen by investors and analysts worldwide as the true measure of riskiness of the firm. This ratio is often quoted in the financials of the company as well as in discussions pertaining to the financial health of the company in TV shows newspapers etc.
Debt to Equity Ratio = Total Debt / Total Equity
The total equity includes retained earnings which have been listed on the balance sheet
There is subjectivity with regards to treatment of preference shares. Some companies add them to debt while others add them to equity based on the relative features of the preference shares issued. However, usually the quantum of preference shares in not big enough to make a difference.
The debt to equity ratio tells the shareholders as well as debt holders the relative amounts they are contributing to the capital. It needs to be understood that it is a part to part comparison and not a part to whole comparison.
The debt to equity ratio measures the amount of debt based on the figures stated in the balance sheet. Of late there have been many ways figured out to take on debt without it showing up on the balance sheet.
The debt to equity ratio is a very old measure and is not meant to take into account such complication. Some analysts factor in off balance sheet debt as well to get a better picture. However, they do not have enough information to be very accurate at this endeavor.
Debt to equity ratio provides two very important pieces of information to the analysts. They have been listed below.
Shareholders as well as debt holders want to know what the maximum downside is and debt to equity ratio helps them understand what they would end up with if the company were to stop functioning as a going concern.
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