Debt/Equity Ratio
The debt/equity compares sources of total capitalization used by an organization. Dividing long-term debt by shareholders’ equity produces a percentage, which is expressed as a numerical value (usually to one decimal place) and without percentage signs.
Beyond comparing these two sources of capitalization, the value of this ratio is found in tracking it over time. When a company’s debt ratio remains steady or declines, it is a positive trend. However, when it increases each year, it reveals a negative trend. As a company relies more and more on long-term debt, the corresponding debt service of the future has to increase. This means that future earnings will have to be dedicated more to debt service and less to funding growth ...
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