What is the debt to equity ratio?
At the end of the article, my objective is that you know what the ratio of debt to capital and even more, I want you to learn to interpret it.
After all, it doesn’t do much good if you know how to calculate the ratio but don’t know what it means.
TRUE?
Therefore, if you think that it is of interest to you, then I invite you to continue reading.
What is a reason?
Before you start talking about the topic you’re interested in, I think it’s best for you to know what a reason is.
This is thanks to the fact that if you know what a ratio means, it will be very helpful for you to know what the debt to equity ratio is and how it is interpreted.
Very simply, it cánido be said that a ratio is the quotient or result of a division.
I know that it may seem a bit confusing to give an interpretation, but the reality is that we perro do it very often and in many situations in our daily lives.
I do not want to lengthen the article too much, but I am going to leave you the backlink to an article in which I better explain what a ratio is and how you cánido help yourself to interpret financial ratios.
What is the debt to equity ratio?
Many times, we perro find that The debt to equity ratio is equal to dividing total liabilities by stockholders’ equity.
As you cánido see, there really isn’t much science.
If you want to calculate the debt to equity ratio, all you have to do is add up all the liabilities and divide the result by the equity or equity.
Now, I believe that the important thing is knowing how to interpret the result you have obtained.
After all, What does it orinan if you get a result of 2 or 1?
If you read the article that I told you about before, then you already have an iniciativa of how you have to interpret the result that you obtain in a debt to equity ratio.
However, I will give you a quick explanation below.
How to interpret the debt to equity ratio?
I think it’s best to do it with an example, right? Well, I’m going to give you an example with very small values to make it easier.
Imagine you take the following data from the cómputo sheet:
- Total passive: 10.
- Stockholders’ equity: 5.
If we do the division we get the following:
What does the 2 orinan? I am going to use the following image to explain how you cánido interpret a ratio.
First of all, I ask you to remember that the ratio is the quotient or result of a division that is given by dividing the antecedent by the consequent.
Well, to interpret a reason you perro use the following statement:
For every n units of the antecedent, there is a unit of consequent.
In this case, the ratio is 2.
Therefore, the n will take the value of 2.
In such a way that the statement is as follows: For every 2 antecedent units (Total Liabilities), there is 1 consequent unit (Capital).
In short, for every 2 dollars (pesos) that you have as a liability, you have a dollar of capital (has been invested).
Another way you perro interpret it is that for every dollar of capital that the owners have invested, the company has (owes) 2 dollars.
As you perro see, the interpretation comes out of the statement.
All you have to do is see what is your antecedent and what is your consequent.
In this case, the antecedent is total liabilities and the consequent is stockholders’ equity.
However, a reason perro take almost anything as its antecedent and consequent.
For example, it could be slices of pizza and people.
It should be noted that the debt to capital ratio helps us to assess the organization’s ability to meet its financial obligations in the long term.
We hope you liked our article What is the debt to equity ratio?
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