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Individual Stocks

Price / Earnings Ratios and Other Calculations

What is a “Debt–to-Equity Ratio”?

A D/E ratio measures a company’s leverage, and how wisely the company is using debt to finance its operations. It is derived by taking the company’s total liabilities (both short- and long-term) and dividing this number by the value of shareholders’ equity. A company with higher debt equity ratios over time means the company is using debt and available credit to finance its growth, rather than using its own current cash flows from generating revenues through sales of its goods and services. A company may likely incur major interest charges to service this debt, which may affect the company’s profitability over time. On the other hand, companies that wisely use debt to generate earnings may generate them by incurring debt rather than relying only upon their own available cash to fuel growth and expansion. If the costs of the debt are higher (especially in an increasingly high-interest-rate environment) than the amount of profit the organization can generate, it could mean an investment in such a company would incur higher risk.



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