Debt to Equity ratio is just what it sounds like - Total Liabilities divided by Shareholders' equity. It's a little like the financial leverage ratio, except that it is more narrowly focused on how much long-term debt the firm has per Dollar of Equity.
A high debt equity ratio for a firm indicates it has been aggressively financing its growth with debt. Due to the the additional interest expenses that have to be borne by the firm, this can result in volatile earnings.
A firm could potentially generate more earnings If a lot of debt is used to finance increased operations (high debt to equity) than it would have if it did not have access to this external financing. Shareholders would benefit if this resulted in increased earnings by an amount greater than the debt cost (interest). However, the cost of this debt financing may become too much for the company to handle, especially if earnings are cyclical and volatile, and outweigh the return that the company generates on the debt.
The debt equity ratio also varies depending on the industry in which a firm operates. For example, capital-intensive industries such as auto manufacturing tend to have a debt equity ratio above 2, while software companies have a debt equity ratio of under 0.5.
A high debt equity ratio for a firm indicates it has been aggressively financing its growth with debt. Due to the the additional interest expenses that have to be borne by the firm, this can result in volatile earnings.
A firm could potentially generate more earnings If a lot of debt is used to finance increased operations (high debt to equity) than it would have if it did not have access to this external financing. Shareholders would benefit if this resulted in increased earnings by an amount greater than the debt cost (interest). However, the cost of this debt financing may become too much for the company to handle, especially if earnings are cyclical and volatile, and outweigh the return that the company generates on the debt.
The debt equity ratio also varies depending on the industry in which a firm operates. For example, capital-intensive industries such as auto manufacturing tend to have a debt equity ratio above 2, while software companies have a debt equity ratio of under 0.5.
