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Simple English definitions for legal terms
debt-to-equity ratio
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A quick definition of debt-to-equity ratio:
Debt-to-Equity Ratio: This is a way to measure how much a company owes compared to how much it actually owns. It is calculated by dividing the company's long-term debt by the amount of money that the owners have invested in the company. This helps to show how much of the company's funding comes from borrowing money versus how much comes from the owners' investments.
A more thorough explanation:
The debt-to-equity ratio is a financial metric used to evaluate a company's capital structure. It is calculated by dividing a company's long-term debt by its owners' equity. This ratio helps investors and analysts understand how much debt a company is using to finance its operations compared to the amount of equity it has.
For example, if a company has $1 million in long-term debt and $2 million in owners' equity, its debt-to-equity ratio would be 0.5. This means that the company has half as much debt as equity.
A high debt-to-equity ratio can indicate that a company is relying heavily on debt to finance its operations, which can be risky if the company is unable to make its debt payments. On the other hand, a low debt-to-equity ratio can indicate that a company is using more equity to finance its operations, which can be less risky but may also limit the company's growth potential.