I’m currently doing a crash course about Stocks and I need to understand this bit of reading Stock Profile. What does a small or big number indicate? Let’s say Stock A has a Debt to Equity of 6.41 and Stock B has Debt to Equity of 100.52, which one is looking good?
Since I’ve heard that it’s also essential to measure this part, but I just can’t understand what the number entails. Tysm~ Any more inputs would be greatly appreciated.
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Debt to equity ratio is a measure of debt coverage.
Basically, a company has assets. Ownership of those assets are split into liabilities, and equity.
Equity is the value of the assets owned by shareholders after liabilities are taken care of. Liabilities is the value owed to creditors and other entities through the course of running the business. Not all liabilities are debts, and the debt equity ratio does not take those into account.
The debt-equity ratio indicates how well a company can cover its debts, and is a measure that lenders can use to determine the risk in lending more money to that company.
Basically, a debt to equity ratio answers the question of “for every dollar the company owned by shareholders, how many dollars does the company owe to creditors?”.
If a company has a debt equity ratio of 3, then the company owes $3 for every $1 owned by the shareholders. If the ratio is .75, then only $0.75 is owed per ever $1 owned.
A debt-equity ratio of 2-2.5 is typically considered as good. A lower ratio is better. A higher debt-equity ratio is worse. But having a debt-equity ratio – leveraging credit to fund growth can be seen as positive in many situations.
Debt is how much the company owes, equity is how much stuff is owned by shareholders. A company with high debt and low equity can’t take out loans if they need to so that’s usually a bad sign. I was always told you should look for companies with a debt-equity ratio around 2.5. 6.5 sounds bad and 100.25 sounds INCREDIBLY BAD
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