What is the debt to equity ratio?
The debt to equity ratio or debt-equity ratio is calculated by dividing a corporation’s total liabilities by the total amount of stockholders’ equity: (Liabilities/Stockholders’ Equity):1.
A corporation with $1,200,000 of liabilities and $2,000,000 of stockholders’ equity will have a debt to equity ratio of 0.6:1. A corporation with total liabilities of $1,200,000 and stockholders’ equity of $400,000 will have a debt to equity ratio of 3:1.
Generally, the higher the ratio of debt to equity, the greater is the risk for the corporation’s creditors and its prospective creditors.
Learn more about Financial Ratios.
About the Author: Harold Averkamp (CPA) has worked as an accountant, consultant, and university accounting instructor for more than 25 years.He is the author of the 2010 Master Accounting Download Package which has been praised for it's ability to simplify accounting in a way that anybody can understand.
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Its ok.. But still some more explanation is needed.
What is the generally accepted ratio under normal operations? or at what point one will say the company is operating at an optimal when debt financing is involved?
clarify whether debt is total debt or only long term liability
wasonga twitty you should read carefully Liabilities = long term debt + current debt