Debt to Equity

RECENT NEWS
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).
Agrimoney.com  Dec 16  Comment 
The tractor dealer compltes debt-to-equity swap, as it nears the end of a restructuring and public listing forced by weak Russian sales
The Economic Times  Dec 10  Comment 
Given the high debt-to-equity ratio of 10, the company may need capital infusion if it starts making losses.
The Economic Times  Jun 30  Comment 
Aggregate net debt of the BSE-500 cos has declined by 8% in FY15, but net debt/equity for mid and small cos remains well above 1x.
The Times of India  Jun 30  Comment 
Extrapolating the KISS (`Keep It Simple Stupid') principle in the investing space, financial planners and advisers say that the ratio of debt-to-equity in a person's investment portfolio should be decided by a simple formula -100 minus your age...




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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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