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Debt to Equity Ratio


Definition: The Debt to Equity Ratio measures how much money a company should safely be able to borrow over long periods of time. It does this by comparing the company's total debt (including short term and long term obligations) and dividing it by the amount of owner's equity (which is explained in part 26.) For now, you only need to know that the number can be found at the bottom of the balance sheet. You'll actually calculate the debt to equity ratio in segment two when we look at real balance sheets.)

The result you get after dividing debt by equity is the percentage of the company that is indebted (or "leveraged"). The normal level of debt to equity has changed over time, and depends on both economic factors and society's general feeling towards credit. Generally, any company that has a debt to equity ratio of over 40 to 50% should be looked at more carefully to make sure there are no liquidity problems. If you find the company's working capital, and current / quick ratios drastically low, this is is a sign of serious financial weakness. - Excerpt from Investing Lesson 3.

You can find more information in the Financial Ratio subject.

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