What Is a High Debt-to-Equity Ratio?

The 澳洲幸运5官方开奖结果体彩网:debt-to-equity (D/E) ratio is a metric that provides insight into a company's use of debt. In general, a company with a high D/E ratio is considered a🐽 higher risk to lenders and investors because it suggests that the company is financing a significant amount of its potential growth through borrowing. What is considered a high ratio can depend on a variety🌊 of factors, including the company's industry.

Understanding the Debt-to-Equity (D/E) Ratio

The D/E ratio relates the amount of a firm’s 澳洲幸运5官方开奖结果体彩网:debt financing to its equity. To calculate the D/E ratio, divide a firm's total liabilities by its total澳洲幸运5官方开奖结果体彩网: shareholder equity—both items are found on a company's 澳洲幸运5官方开奖结果体彩网:balance sheet. The comไpany’s capital structure is the driver of the debt-to-equity ratio. The more debt a company uses, the hig🍌her the debt-to-equity ratio will be.

Debt typically has a lower 澳洲幸运5官方开奖结果体彩网:cost of capital compared to equity, mainly because of its seniority in the case of 澳洲幸运5官方开奖结果体彩网:liquidation. Thus, many companies may prefer to use debt over equity for capital financing. In some cases, the debt-to-equity calculation may be limited to include only short-term and long-term debt. Most often, it also includes some form of additional f﷽ixed payments. Together, the total debt and total equity of a company combine to equal its total capital, which is also accounted for as ✤total assets.

Analyzing the Debt-to-Equity (D/E) Ratio by Indus🅰tr🏅y

As is typical in financial analysis, a single ratio, or a line item, is not viewed in isolation. Therefore, the D/E ratio is typically considered along with a few other variables. One of the main starting points for analyzing a D/E ratio is to compare it to other company's D/E ratios in the same industry. Overall, D/E ratios will differ depending on the industry because some industries tend to use more debt financing than others. In the financial industry, for example, the D/E ratio tends to be higher than in other sectors because banks and other 澳洲幸运5官方开奖结果体彩网:financial institutions bor🎉row money to lend money, which can result in a higher level of debt.

Other industries that tend to have large capital project investments also tend to be characꦏterized by higher D/E ratios. These industries can include utilities, transportation, and energ💮y.

Speciꦿal Considerations for the ♑Analysis of D/E Ratios

A popular variable for consideration when analyzing a company’s D/E ratio is its own historical average. A company ma🌳y be at or below the industry average but above its own historical average, which can be a cause for concern. In this case, it is important to analyze the company’s current situation and the reasons for the additional debt.

The 澳洲幸运5官方开奖结果体彩网:weighted average cost of capital (WACC) can provide insight into the vari𒈔ability of a company’s D/E ratio. The WACC shows the amount of interest financing on the average per dollar of capital. The equation also breaks down the average payout forဣ debt and equity.

If a company has a low average debt payout, this implies that the company is obtaining financing in the market at a relatively low rate of interest. This advantage can make the use of debt more attractive🔯, even if the D/E ratio is higher than comparable companies.