Debt to Equity

RECENT NEWS
Wall Street Journal  8 hrs ago  Comment 
Troubled lender Banca Monte dei Paschi di Siena started a $4.6 billion debt-to-equity swap offer, the first step of an ambitious recapitalization plan it needs to carry out by the end of the year.
The Economic Times  Nov 10  Comment 
As on September 30, 2016, consolidated net debt stood at Rs 187.6 crore representing a net debt to equity ratio of 0.20.
Reuters  Oct 10  Comment 
China unveiled guidelines on Monday to reduce rising corporate debt levels which some analysts fear could destabilise the world's second-largest economy.
Reuters  Sep 26  Comment 
Banca Monte dei Paschi di Siena said on Monday it was considering a voluntary conversion of its debt into equity as the Italian lender mulls its options to prevent its...
Benzinga  Mar 22  Comment 
Lannett Company, Inc. (NYSE: LCI) traded up almost 5 percent on Tuesday. The stock is trading at a P/E of 6.19, Forward P/E of 5.24, PEG of 0.55, and P/FCF of 6.37, all indicators cheaper than peers. Of note, Debt/Equity and Long term...
The Economic Times  Mar 11  Comment 
In Hong Kong, the Hang Seng index added 0.8 percent, to 20,133.78 points, while the Hong Kong China Enterprises Index gained 1.2 percent, to 8,521.02.
Motley Fool  Dec 25  Comment 
It's all about the debt-to-equity ratio (and how to calculate it).




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The debt to equity ratio is a measure of the company's total long-term debt divided by shareholder's equity

The debt to equity ratio gives the proportion of a company (or person's) assets that are financed by debt versus equity. It is a common measure of the long-term viability of a company's business and, along with current ratio, a measure of its liquidity, or its ability to cover its expenses. As a result, debt to equity calculations often only include long-term debt rather than a company's total liabilities.

A high debt to equity ratio implies that the company has been aggressively financing its activities through debt and therefore must pay interest on this financing. If the company's assets generate a greater return than the interest payments, then the company can generate greater earnings than it would without the debt. If not, however, and the company's debt outweighs the return from its assets, then the debt cost may outweigh the return on assets. Over the long-term, this would lead to bankruptcy . Investors should take this into consideration when investing in a company with a high debt to equity ratio, especially in times of rising interest rates.

Debt to equity ratios vary across industries. Capital intensive industries such as airplane manufacturers tend to have higher debt to equity ratios -- typically greater than 2. Less capital intensive industries, such as a software company, can have lower debt to equity ratios of under .5.

Examples

  • To start, Widgets Inc. has long term debt of $1 million and shareholder's equity of $1 million for a debt to equity ratio of 1, which is fairly standard in the widget industry.
  • To increase production, Widgets Inc. enters into a loan of $2 million in order to finance a new widget manufacturing facility, which increases its debt to equity ratio to 3 (=[$1 million previous debt + $2 million in new debt]/[$1 million in equity]) . The company pays 5% interest on the loan while its new facilities generate a 7% return. In this case, a higher debt to equity ratio allows the company to increase earnings beyond what would have been possible otherwise. The high debt to equity ratio is worthwhile for the company.
  • One year later, however, interest rates on the loan rise to 9%. Now, the company is paying more for its debt than the 7% it is generating out of its new facilities. The company's high debt to equity ratio and increasing debt payments now put the company at risk of going bankrupt.
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