May 102020
 

The debt to equity ratio of a company is simply its level of debt (any type of borrowed money – from bank loans to bonds issued by the company) divided by equity (the shareholders’ money in the business). Expressed as a percentage, this gives the companies ‘gearing’. A company with a high level of debt will have a high debt-to-equity ratio, and hence be ‘highly geared’. A high level of gearing helps companies to produce better returns for shareholders when times are good, but in bad times, the highly geared are saddled with having to pay interest on their debt. Those which have chosen a high level of equity finance instead of debt, on the other hand, are not obliged to pay out – dividends are discretionary – and can often weather bad times better. The appropriate mix of debt and equity depends on the type of business – those with stable long-term incomes (tobacco companies, for example) can better cope with being highly geared.

Our life is a learning experience. Every day make sure you learn something new. Learn explanations of banking words such as Debt to equity ratio every day and you will fly!

Comments?

Every comment you leave gets you an entry into the draw for 100 GBP of vouchers from Amazon UK. Next winner will be selected on [date].

Comment now!

 Leave a Reply

You may use these HTML tags and attributes: <a href="" title=""> <abbr title=""> <acronym title=""> <b> <blockquote cite=""> <cite> <code> <del datetime=""> <em> <i> <q cite=""> <s> <strike> <strong>

(required)

(required)