Debt to Equity Ratio (DER) is a financial ratio that shows the relative proportions between equities and Debt use to finance the company's assets. The ratio of Debt to Equity is also known as the Leverage ratio (ratio of the lever) is a ratio use to measure how well the investment structure of an enterprise.
Debt to Equity Ratio is a financial ratio or DER main and use to assess the financial position of a company. This ratio is also a measure of the company's ability to pay off its obligations. The ratio of Debt to Equity ratio it is important to note at the time of checking the financial health of the company.
If the ratio is increase, this means that the company finance by creditors (debt giver) and not from its own financial resources may be a trend that is quite dangerous. Lenders and Investors typically choose a Debt to Equity Ratio is low because their interests are more protect in case of a downturn in the company's business is concern. Thus, the company has a Debt to Equity Ratio or Debt Ratio against its high Equity may not be able to attract additional capital with loans from other parties.
The formula of the Debt to Equity Ratio (DER)
The ratio of Debt Against Equity or Debt to Equity Ratio (DER) is calculate by taking total debt obligations (Liabilities) and share them with equity (Equity). Below is the formula of the Debt to Equity Ratio (DER).
Debt to Equity Ratio (DER) = Total Debt/Equity
Note:
- Debts or Obligations (Liabilities) is an obligation that must be paid in cash to the other party within a certain period. Base on a period of repayment, the obligation or debt are usually classify into current liabilities, long-term liabilities and other obligations.
- Equity (Equity) is the owner of the rights over the assets or the assets of the company which is the net worth (total assets less liabilities). Equity deposit can consist of company owners and the rest of the profit being detain (retain earnings).
Examples of Cases the calculation of the Debt to Equity Ratio (the ratio of the debt against Equity)
Base on the financial code issuers with organization has the duty or Liability of $700,68 million and equity (Equity) of $359,51 million.
What is the Debt to Equity Ratio – organization have?
Note:
Total Liabilities (liability) = US $700,68 million
in Total equity (Equity) = US $359,51 million
Debt to Equity Ratio (DER) =?
Answer:
(1) Debt to Equity Ratio (DER) = Total Liabilities/Total Equity
(2) Debt to Equity Ratio (DER) = US $700,68 million/US $359,51 million
(3) Debt to Equity Ratio (DER) = 1.94 times
Assessment of the Debt to Equity Ratio (the ratio of the debt Against Equity)
In General, Debt to Equity Ratio or Debt Ratio towards the optimal Equity in a company is about 1 times. Where the amount of the debt is equal to the amount of equity. However, this ratio differs between one type of industry with other industries. Since it depends on the proportion of current assets and assets not smoothly. The more assets or assets not smoothly (as in capital intensive industries). The more equity need to finance long-term investments.
Many of the most companies, the ratio of Debt against equity (Debt to Equity Ratio). That can be accept is range between 1.5 times to 2 times. For larger companies that already go public (public company). Debt to Equity Ratio could attain 2 times or more and are still consider "acceptable". However, for small and medium companies, that number is unacceptable.
In General, the ratio of Debt against equity high indicates. That the company may not be able to generate enough money to meet its debt obligations. However, the Debt Ratio against its low Equity can also indicate. That the company is not taking advantage of the increase profit/its profits to the maximum.
Debt to Equity Ratio (DER) or ratio of Debt against Equity is one of the fundamental analysis of stocks.
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