fbpx
Loading...

Debt to Equity Ratio – Definition, Formula, Usage.

By: FinLearn Academy

November 16, 2021

debt to equity ratio

Debt to Equity Ratio 

 

The Debt to Equity Ratio is used to determine the financial leverage of a company.

 

Formula

 

Debt to Equity Ratio  = Total Liabilities / Total shareholder’s equity 

 

It is one of the leverage ratios used. 

 

How to calculate Total liabilities? 

 

This is done by adding the long and short-term debt obligations of the company. The master equation of Assets = Liabilities + Equity is also often used for the same. 

 

Interpretation?

 

The ratio tells us the extent to which the company is taking on debt by leveraging its assets. If a company is aggressive in financing its growth, it is reflected in its high D/E. 

 

If the increased leverage has benefited the company significantly and increased earnings, the ratio would reflect that. However, only an increase in leverage (as indicated by a higher D/E) is not favorable. 

 

Hence it shows us if the cost of debt outweighs the benefits generated. 

 

A ratio of 1.5 implies that a company has Rs. 1.5 in debt for every asset of Rs. 1. 

 

What is a good D/E? 

 

In most cases, a ratio less than unity is considered to be safe, whereas a ratio more than 2 is looked at as risky. 

A too-low ratio is also not a good sign as the company is then not using the avenue of debt to grow. 

Sometimes the ratio can be negative which is seen as a major red flag – it implies that the company has negative shareholder’s liability (more liabilities than assets) and maybe on the verge of bankruptcy. 

 

Modifications 

 

Investors often modify this ratio to exclude short-term debt as it is less risky. It also tends to be cheaper and less responsive to shifting interest rates. 

 

Limitations 

 

Again the ratio needs to be evaluated from the perspective of the industry in which the company operates. Some industries by default have a higher capital requirement and different growth rates, and that should be factored into consideration. 

 

One also needs to be careful of the components in the key elements of the formula, and ensure that its consistent across companies for a correct evaluation. For example, some analysts include preferred stock in the equity portion but the preferred dividend, par value, and liquidation rights make this kind of equity look a lot more like debt which makes the company appear riskier than it actually is. 

 

Portfolio Management Services (PMS)   Like the name suggests a Portfolio Management Service is one that is offered by a…

By: FinLearn Academy

November 2, 2021

What are the existing investors doing?   Ant Group, Alibaba, SoftBank, and Elevation Capital (formerly Saif Partners) are some of…

By: FinLearn Academy

November 2, 2021

  • All
  • Investing
  • Traders Traits
  • Trending
debt to equity ratio

Debt to Equity Ratio – Definition, Formula, Usage

Debt to Equity Ratio    The Debt to Equity Ratio is used to determine the financial leverage of a company….

portfolio-management-services

Portfolio Management Services (PMS)

Portfolio Management Services (PMS)   Like the name suggests a Portfolio Management Service is one that is offered by a…

Paytms IPO

Analysing the Paytm IPO- Things you should know before buying

What are the existing investors doing?   Ant Group, Alibaba, SoftBank, and Elevation Capital (formerly Saif Partners) are some of…

Policybazar IPO

PolicyBazaar’s market debut

PB Fintech Ltd has two key businesses – Policybazaar and Paisabazaar    Company overview    Launched in 2008, Policybazaar is…

Nykaa IPO

Analyzing the Nykaa IPO: Everything you should know 

Nkyaa is one of the very few profitable startups in India. It’s also the first women-led unicorn in India. The…

Bond yields set to rise; further upside towards 6.50%-6.60% levels

The Central Government’s borrowing programme for the Second Half of the financial year was announced a couple of weeks back….

Oil at $88-90 a barrel in 2-3 months can’t be ruled out given the ground realities

With Brent at $86 a barrel, oil is at multi-year highs. The price of oil and gas has gone up as consumption…

What are MFs? Which are the major MFs in the country (AUM Size)

The word investing brings to mind a few vehicles – stocks, gold, real estate, etc. Out of these, a very…

how to analyse an IPO

How to analyze an IPO 

The past few months have seen a lot of companies vouching for the coveted listing on the Indian stock market….

EV/sales, valuation ratio, financial ratio

Interpreting Enterprise-Value-to-Sales (EV/Sales) Ratio: Everything you should know!

Definition Enterprise Value to Sales is a measure that helps value a company, taking into consideration both the equity and…

Crypto 101: A beginners guide

What is cryptocurrency? Cryptocurrency is a virtual currency that uses cryptography (the art of solving codes) and is usually based…

Will Secular Growth Trends Delimit Scope for Deeper Equity Corrections?

The equity market has continued its good run with a surge in the largecap indices in the recent past. But…

PE Ratio

How To Interpret And Analyse The PE Ratio? A Beginners Guide

The Price-Earnings Ratio (also known as P/E ratio) is widely used by investors and analysts for valuing companies in an…

Non- Fungible Token

Demystifying NFT (Non- Fungible Token)- A Beginner’s Guide

What is a NFT? NFT stands for a non-fungible token. The word ‘fungible’ means replaceable and so a non-fungible token…

ASM AND GSM LIST- EVERYTHING YOU SHOULD KNOW

What Is An ASM And GSM List? Why Impact Does It Have On Investors?

ASM and GSM what impact does it have on investors? Slide 1-  Additional Surveillance Measure (ASM) and Graded Surveillance Measure…

ebitda banner

EV/EBITDA- A Beginners Guide To Value Investing

The EV/EBITDA ratio (a type of Enterprise multiple) is used to determine the value of a company.  Formula:  EV/EBITDA =…

DAILY VOICE | Markets may deliver double-digit returns over next 6-7 months: Sachin Shah of Emkay

Outlook for corporate earnings growth is quite strong, in fact at Nifty level earnings are expected to grow at more…

Emerging markets fairly valued; some correction likely but can’t put blame entirely on Fed tapering

Powell said, “My view is that the substantial further progress test has been met for inflation,” and that “There has…

Strong corporate earnings ahead, will invest in new-age internet cos at appropriate time

We believe there is a high probability Nifty Earnings over next 24 months (FY22 & FY23) will grow above 25%…

Likely normalisation of liquidity, probable surge in cost of funds pose near-term risks to markets

The current market rally has been possible, mainly due to liquidity that has been aplenty and because of low interest…

Aggressive investors could follow 50:40:10 equity allocation

As markets near record highs, investors are confused over how they should structure their portfolios. Bhavesh Sanghvi, chief executive officer of Emkay…

Trader’s Point I Rahul- A Beginner to Professional Options Trader

There’s no way around it- If you invest your money in stocks, you’re most likely going to lose money at…

Uncertainty Persists: Are the Fed and the Markets on Parallel Tracks?

Time and again, with a greater amount of accuracy and consistency, the data flows from the US present the picture…

Trader’s Point I Varun Parassary- Journey of a Long-Term Investor

“Know what you own, and know why you own it” — Peter Lynch Choosing to invest in stock can be…

USDINR Spot Looks Strong Above 73.80

After an exciting week, the USDINR spot still remains elevated as the Federal Reserve has encouraged the market participants to price…

RBI May Take Cues From US Fed, Policy Stance to Remain Accommodative

After the recent FOMC (Federal Open Market Committee) meeting, the US Federal Reserve has moved up its target from 2024…

Will Dollar Index Rally Continue Post FOMC?

The US Dollar index witnessed a strong recovery and saw the index hitting a high of 91.48 levels after the hawkish signals…

Fixed Income: Relative Calm Amidst New RBI Measures

The fixed income market remained calm with a stable profile for the most part of the last month. The accommodative…

Bring in some stability to portfolios with fixed income

When we work in an environment, far away from home, and which is quite uncertain and sometimes volatile too, both…

USDINR Spot Sideways Ahead of FOMC Policy

The USDINR spot opened the week on a higher note ahead of the FOMC policy update. There appears to have been a…

USDINR Bulls Await US CPI, After Disappointing NFP

The USDINR spot opened the week on a weaker note after the anxiously awaited US May non-farm payrolls report missed…

Retail participation in equity bound to grow with enhanced financialization of assets and rise in incomes

Joseph Thomas, Head of Research at Emkay Wealth Management feels the vaccination efforts may become more rapid with several state…

Trader’s Point I Arvind Porwal- A Beginner to Professional Options Trader

  “The key to trading success is emotional discipline. If intelligence were the key, there would be a lot more…

Equities Trying to Maintain the Altitude, and How!

The equity markets have been volatile with movements on both sides, mainly occasioned by developments abroad. The prospects of the…

Traders Point I Ayush Aggarwal- A Beginner’s Journey of Exploring Positional Trading

The most common advice you get in financial planning is to protect your money from Inflation. But how do you tame…

Economic growth expected to accelerate in US, China in expansionary phase too

The US’ first-quarter GDP growth for 2021 was at 6.4 percent against the estimated 6.5 percent but signifies a major…

All that glitters: Is gold a good investment option for NRIs?

The yellow metal is an essential ingredient of any investment portfolio for many centuries. It is not just private individuals…

Traders Point I Adarsha- Journey of a Positional Trader

If you ask a bunch of traders about the “perfect trading strategy” to follow, you’ll likely hear a different one…

Trader’s Point I Manisha – School Teacher to Trading – Journey of a Profitable Options Trader

Trading not only requires lots of patience and discipline but also an in-depth education of the market to become a…

Traders Point I Sunny Singh- Journey of an Intraday Trader

Day Trading isn’t everyone’s cup of tea. It requires extreme discipline, patience, and most importantly- proper education. One must learn…

Traders Point I Sanket Vaidya- A Beginner’s Journey of Exploring Intraday Trading

Indeed, day trading is one of the most lucrative career paths towards achieving desired financial independence. But being a zero-sum…

The legendary Love-Hate relationship of Nifty & Rupee-Our currency

Recently, the U.S dollar traded comparatively higher against all of the major currencies following the news of the spike in…

Traders Point I Ranjini Thakur- How Ranjini Thakur Quit Her 9-6 MNC Job & Followed Her Passion for Trading

Predominantly, the stock market is supposed to be a man’s domain, though the quality that separates women from men is…

Here is why rising interest rates are considered the worst enemy of equity markets

The US bond yields have moved up quite sharply, the 10-year treasury has touched 1.60 percent and this movement is…

Traders Point I Abhishek Kumar- Journey of a Beginner to a Professional Swing Trader

“There is no single market secret to discover, no single correct way to trade the markets. Those seeking the one…

Well run mid- and small-caps seeing strong growth: Emkay Investment CEO

Vikaas Sachdeva, Chief Executive Officer of Emkay Investment Managers, sees “the search for alpha” driving sophisticated investors to the alternates…

How to invest in a volatile market

It is a very ,very crazy market, we fall hard and we come back fast! We are in the midst…

What a rise in US bond yields mean for investors and Indian equities

Interest rates came down to low levels and liquidity became aplenty due to the accommodative monetary policies by world central…

Q3 GDP: Need more to say that India is really growing instead of recovering somehow to feeble single digit levels

The GDP growth number for the third quarter at 0.40 percent corresponds to more or less what most of the…

Scope for upgrade in financials; CRAMs can be multi-year growth story: Kashyap Javeri of Emkay

The financial sector consists of many markets including but not limited to the Commodity Market, the Currency Trading Market, Options…

Financial goals achieved by part-time, full-time trading

A Money drives many decisions that we make on a daily basis. Setting goals can help us take control and…

While trading in a volatile market, this move may help investors safeguard investments

Trading is a business, and no business is successful sans a business plan. A business trade plan is a comprehensive…

How To Create A Secondary Source Of Income In Times Of A Pandemic?

Generating multiple streams of income can positively impact your finances. We often hear about the importance of diversifying our investments…

Stock Market Investment: 5 smart ways to become a successful trader in the stock market

Trading has very low entry barriers and can be a consistent and independent business, if executed thoughtfully and planned conscientiously….

8 Questions a Trader should ask while Trading

Without conscious planning in share market trading, we can get into a trap of wide choices. Being a jack of…

Why Trading education is a must for venturing into Finance industry

Millennials are taking their first step towards learning the basics of stocks and futures. Trading should have access to multiple sources of quality education. It’s quite similar to learning car driving i.e. trial & error coupled with the ability to…

Skills Vs Challenge

With the commencement of the 2019 Cricket World Cup, it is only natural that in our cricket crazy nation, fans…

Weekly Pass

Confused what course / style is best suited to you? Unsure whether the course is worth your time?

Hop in and out of sessions for the week to find your groove, and pay the remainder amount of whichever course you prefer OR BOTH (We’re sure you’ll continue!!)

Weekly Pass

×

Enter your mobile number to get started

We will send you a one-time verification code


Please enter the code to verify your phone number

We sent it to on +91XXXXXXXX Edit


x