What is the debt-to-equity ratio and why is it important?

What is the debt-to-equity ratio and why is it important?

The debt-to-equity ratio is a financial metric that compares a company's total liabilities to its shareholder equity. It's important because it helps investors understand the level of financial risk a company is taking.

How do you calculate the debt-to-equity ratio?

You calculate it by dividing total liabilities by total equity. The formula is: Debt-to-Equity Ratio = Total Liabilities / Total Equity.

What does a high debt-to-equity ratio indicate?

A high debt-to-equity ratio indicates that a company is heavily financed by debt, which can be risky if it struggles to meet its obligations.

What is considered a good debt-to-equity ratio?

A good debt-to-equity ratio typically ranges from 1 to 1.5, but it can vary by industry. Lower ratios are generally seen as less risky.

Can the debt-to-equity ratio vary by industry?

Yes, different industries have different capital structures, so the acceptable debt-to-equity ratio can vary significantly.