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Accounting Allah shmoop debt to equity ratio All right Lots

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of thinking about death Why so much Deep inspection Well

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because when debt goes bad life gets really bad Like

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you know company leverage is like adding nitrous oxide to

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your gas tank It can make your car go really

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fast But when things go wrong well this happens So

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framing how much is too much when it comes to

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debt is a big deal and the ratios are in

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Horton The big debt ratio that gets called upon by

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nervous bond investors most of the time is the debt

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to equity ratio which is simply this It's total debt

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divided by total equity Well the most pragmatic of the

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debt coverage ratios is the times interest covered ratio which

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is just operating profits divided by interest expense Right And

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why do you forget tax in this equation Because interest

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costs are deductible against taxes So if you had a

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year where your company had one hundred million dollars in

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operating profits and no debt while at a thirty percent

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corporate tax rate you'd pay thirty million bucks in taxes

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the next year you take out two billion dollars in

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debt at five percent Well you know two billion times

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five percent or one hundred million dollars in interest Well

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if you still had operating profits of one hundred million

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dollars at that point you'd o zero taxes Why Well

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we repeat because interest costs are deductible against taxes there

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are cost of running the business Well basic idea is

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that if you have a large multiple of interest costs

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in the form of operating profits now then you should

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be in good shape too Pay the interest on your

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debt and lived to fight another day But if your

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company's margins decline or should they God forbid go negative

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Well and you're saddled with two billion dollars of debt

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you would end up getting clear channelled That's not a 00:01:52.0 --> [endTime] good thing

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