It’s just a balance sheet ratio. Long-term debt is the numerator, and it’s just debt that doesn’t come due for a year or longer. And then, in the denominator, you have total assets, short-term and long-term. You get this magic ratio which kinda sorta speaks to how “safe” the company is with respect to its debts.
A hugely high ratio would mean that the company is kissing bankruptcy (with tongue). Like...if it had a billion bucks in debt and only $300 million in assets, um, that’d be a problem. They borrowed money, invested, or used it poorly, and now they are likely dead meat.
The opposite—say, $50 million in long-term debt, debt that’ll be around a long time—with assets of a billion bucks...is likely a well-capitalized company whose balance sheet is mighty. At least for now.
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Finance: What is the Debt to Equity Rati...18 Views
Finance allah shmoop shmoop What is the debt to equity
ratio or duras It is named in insane asylums all
over the world Well it's a balance sheet computation that
tries very roughly to measure how efficient a company is
using its precious capital resource is the numerator comprises long
term liabilities on ly For most companies with debt the
amount of long term debt vastly outweighs the short term
So they ignore the short The denominator is the company's
shareholder's equity Easy You know that computation right ale and
think that's the capital invested in the business that's what
Isthe so what does it mean to have a high
durer Well if shmoop a loops llc a producer of
the most delicious cereal on the planet has four billion
dollars of debt And on lee fourteen dollars of equity
will you don't have to be a wall street genius
to get that that's bad right Tons of debt almost
no equity It means that loans comprise some ninety nine
percent of the company and well that it is essentially
owned by the bank and other creditors not by the
equity stake holders And you want steak Flip things around
Your cisco networks with a billion dollars of debt and
like fifty billion dollars of equity Well the shareholders clearly
owned this company The size of the equity dwarfs the
size of the debt Got it Bottom line High ratio
bad low ratio Good at least if you're one of
the owner investors But if you're a banker with a
hankering to own a cereal company well then today you 00:01:33.338 --> [endTime] might be able to just take one over girls