Paper-Work in Job Order Costing
Quotation: The job begins with a quotation given to a client. For the client, all that matters in the quotation are the costs involved. However, for the contractor, quotation is almost a research document. Giving out quotations requires estimation. Contractors usually have fixed methodologies for estimating these costs. A study of past quotations can tell […]
What is Sports Tourism?
There is a lot of discussion that goes on about the economic impact of sporting events. It is commonly believed that sporting events benefit the overall economy of a region in many ways. However, tourism is often considered to be one of the main ways in which an economy benefits from the proliferation of sports […]
Equivalent Annual Costs
In the previous articles we have seen how we can convert a possible future stream of cash flows to its present value today to make investment decisions. We choose amongst competing projects and the one with the highest NPV is usually selected. But sometimes this may not be the appropriate thing to do. Example: Consider […]
Different Types of Accounts in a Business
The entity concept separates the concerns of the owners from the business. An extension of the same concept is the concept of accounts which splits up the business’s affairs further. The account concept becomes clearer once the double entry system of accounting is explained. That is done at a later stage in the tutorial. Transactions […]
Junk Bonds in Investment Banking
Investment bankers help their clients raise money by selling equity as well as bond securities on the securities markets. Investors know that equity securities are risky by their very design. However, when investors think about debt, they often think about secure investments, which are almost certain to pay a fixed rate of return. Debt is […]
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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