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Fire Your Stock Analyst!: Analyzing Stocks on Your Own by Harry Domash

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Low Debt

Comparing total liabilities to shareholder’s equity is the best gauge of high debt versus low debt. Both are balance sheet items. The result is the total liabilities to equity ratio (TL/E).

TL/E = total liabilities/shareholders equity

Don’t confuse the TL/E ratio with D/E and the total debt to equity ratios listed on many financial sites. The D/E ratio compares long-term debt to shareholders equity, and the total debt to equity ratio compares the total of short- and long-term debt to equity. Total liabilities, by contrast, include all of the company’s liabilities, whether they’re labeled debt or something else.

The difference between using TL/E compared to the traditional D/E ratios is substantial. Consider Lucent Technologies.

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