What Is a High Debt-to-Equity Ratio?

The 澳洲幸运5开奖号码历史查询:debt-to-equity (D/E) ratio is a metric that provides insight into a company's use of d🥃ebt. In general, a company with a high D/E ratio is considered a higher risk to lenders and investors because it suggests that the company is financing a significant amount of its potential growth through borrowing. What is considered a high ratio can depend on a variety of factors, including the company's industry.

Understanding the Debt-to-Equity (D/E) Ratio

The D/E ratio relates the amount of a firm’s 澳洲幸运5开奖号码历史查询:debt financing to its equity. To calculate the D/E ratio, divide a firm's total liabilities by its total澳洲幸运5开奖号码历史查询: shareholder equity—both items are found on a company's 澳洲幸运5开奖号码历史查询:balance sheet. The company’s capital ༒structure is the driver of the debt-to-equity ratio. The more debt a company uses, the higher the debt-to-equity ratℱio will be.

Debt typically has a lower 澳洲幸运5开奖号码历史查询:cost of capital compared to equity, mainly because of its seniority in the case of 澳洲幸运5开奖号码历史查询:liquidation. Thus, many companies may prefer to use debt over equity for capital financing. In some cases, the debt-to-equity calculation may be limited to include only short-term an🌞d long-term debt. Most often, it also includes some form of additional fixed payments. Together, the total debt and total equity of a company combine to equal its total capital, which is also accounted for as total assets.

Analyzi🍎ng the Debt-to-Equity (D/E) Ratio by🍌 Industry

As is typical in financial analysis, a single ratio, or a line item, is not viewed in isolation. Therefore, the D/E ratio is typically considered along with a few other variables. One of the main starting points for analyzing a D/E ratio is to compare it to other company's D/E ratios in the same industry. Overall, D/E ratios will differ depending on the industry because some industries tend to use more debt financing than others. In the financial industry, for example, the D/E ratio tends to be higher than in other sectors because banks and other 澳洲幸运5开奖号码历史查询:financial institutions borrow money toꦫ lend money, which can result in a higher level of debt.

Other industries that tend to have large capital project investments also teꦯnd to be characterized by higher D/E ratios. These industries can include utilities, transportation, and energy.

Special Consi⛎derations for the Analysis of D/E Ratios

A popular variable for consideration when analyzing a compa༒ny’s D/E ratio is its own historical average. A company may be at or below the industry average but above its own historical average, which can be a cause for concern. In this case, it is important to analyze the company’s current situation and the reasons for the additional debt.

The 澳洲幸运5开奖号码历史查询:weighted average cost of capital (WACC) can provide insight into the variability ofꦇ a company’s D/E ratio. The WACC shows the amount of interest financing on the average per dollar of capital. The equation also breaks down the average payout for debt and equity.

If a company has a low average debt payout, this implies that the company is obtaining financing in thꦛe market at a relatively low rate of interest. This advantage can make the use of debt more attractive, even if the D/E ratio is higher than comparable companies.