2016-12-09 00:00:00 Equity English Learn about the debt-to-equity ratio, which tells investors how much financial leverage a business has. https://d1bkf7psx818ah.cloudfront.net/wp-content/uploads/2017/03/08214654/small-business-owner-schedules-debt-payment.jpg Debt to Equity Ratio

Debt to Equity Ratio

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The debt-to-equity ratio measures the amount of debts a company uses to finance its capital and indicates how financially leveraged a company is. This ratio is calculated by dividing a company’s total liabilities by its total equity.

For example, company A has a total equity of $200,000, and its liabilities total to $40,000. The company’s debt-to-equity ratio is $40,000 divided by $200,000, or 20 percent. Company B also has a total equity of $200,000, but it liabilities total to $500,000. Company B’s debt-to-equity ratio is $500,000 divided by $200,000, or 250 percent. Compared to company A, company B relies more heavily on debt to finance its capital and is a riskier investment for investors.

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Information may be abridged and therefore incomplete. This document/information does not constitute, and should not be considered a substitute for, legal or financial advice. Each financial situation is different, the advice provided is intended to be general. Please contact your financial or legal advisors for information specific to your situation.

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