Debt to Equity Ratio

The Formula looks like this

(Total Liabilities) / (Shareholder Equity)

This formula can also be used by replacing the total liabilities with the Long term debt. This can give a better long term look at a company.

A company with lower ratio will have less to pay off and will not have to worry about big expenses. A company with higher debt has bigger bills they have to pay off. The idea behind this ratio is that a company with less debt means they should be around longer and have less financial stress on their backs.

This does not mean that if you find a company that have a lot of debt it is a bad investment. A company with a higher debt to equity ratio can be a good investment in some situations.

They can use the debt to reinvest in themselves and to grow. Just be cautious if the debt is too high. A lot of debt can also lead to bankruptcy if the given company becomes unable to pay their bills.

This ratio should be compared other companies in the same industry group with each other. Using them to compare companies in different industry groups may not work as well because some industry groups will naturally acquire more debts then others just to run their day to day operations.

Other Ratios

If you want to look inside a company and see how financially stable they are. There are plenty of ratios to help you out.

Return on Capital Employed – Shows what a company makes based off of the capital it uses

Interest Coverage Ratio - A ratio that looks at a company’s ability to pay its interest

Average Collection Period - Sometimes a company can take a while to collect the payments owed to it. This ratio looks at how long it will really take