Financial Accounting I

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Debt-to-equity ratio

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Financial Accounting I

Definition

The debt-to-equity ratio is a financial metric that compares a company's total liabilities to its shareholders' equity. It indicates the relative proportion of debt and equity used to finance a company's assets.

5 Must Know Facts For Your Next Test

  1. A high debt-to-equity ratio may indicate higher financial risk due to increased debt levels.
  2. It is calculated by dividing total liabilities by shareholders' equity.
  3. A lower ratio suggests that a company is using less leverage and relying more on equity financing.
  4. This ratio helps investors understand the financial structure and risk profile of the company.
  5. Industry norms vary; what is considered an acceptable ratio in one industry might be high or low in another.

Review Questions

  • What does a high debt-to-equity ratio signify about a company's financial risk?
  • How do you calculate the debt-to-equity ratio?
  • Why might investors be concerned with a company's debt-to-equity ratio?
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