"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 4.
You can find more information in the Financial Ratio subject.
