Debt to Equity Ratio

The Debt to Equity Ratio measures how much money a company should securely be able to borrow over long periods of time,it is computed by dividing its total liabilities by stockholders' equity

Total Liabilities
= -----------------------
Shareholders Equity

Investors will use the debt/equity ratio mainly to decide what amount of risk there may be in either buying equity in the company through stock, or purchasing bonds issued by the company,

For example if a company has long-term debt of RS 3,00,000 and shareholder's equity of RS 12,00,000 then the debt/equity ratio would be RS 3,00,000 divided by RS 12,00,000 = 0.25. It is vital to realize that if the ratio is more than 1, the majority of assets are financed through debt. If it is less than 1, assets are primarily financed through equity.

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