UK Accounting Glossary
A comparison between the company’s total assets and its short- and long-term debts. This ratio is often used to measures a company’s ability to borrow and repay money, or its future prospects.
The debt/equity ratio is a capitalization ratio. The debt/equity ratio equals the sum of company’s bonds plus preferred stock divided by the sum of its common stock at par plus capital surplus plus retained earnings. The debt/equity ratio can be found in a company’s income statement. The debt/equity ratio is used to measure credit strength and is one indicator of a company’s bankruptcy risk. The debt/equity ratio indicates the amount by which a company is financed by credit, or the total amount owed compared to the total amount owned. A higher debt/equity ratio generally means a company has been actively financing its growth with debt. A debt/equity ratio exceeding 100% means that outside capital by lenders exceeds the capital provided by ownership. The average debt/equity ratio varies by industry and what is a normal debt/equity ratio for one company may be high for a company in a different industry.
Acme has a very low debt-to-equity ratio, so it is an attractive company for investors who are looking at long-term investment portfolios.
Many startup companies have a high debt-to-equity¬ ratio, but are expected to reverse their initial numbers within the first five years.
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This glossary post was last updated: 7th February 2020.