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Simple English definitions for legal terms
debt-equity ratio
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A quick definition of debt-equity ratio:
The debt-equity ratio is a way to measure how much a company owes compared to how much it owns. It is calculated by dividing the company's long-term debt by the amount of money its owners have invested. This helps to determine how much of the company's funding comes from borrowing versus how much comes from its owners. It is also called the debt-to-equity ratio or debt-to-net-worth ratio.
A more thorough explanation:
The debt-equity ratio, also known as the debt-to-equity ratio, is a financial metric used to evaluate a company's capitalization. It is calculated by dividing a corporation's long-term debt by its owners' equity.
For example, if a company has $500,000 in long-term debt and $1,000,000 in owners' equity, its debt-equity ratio would be 0.5.
The debt-equity ratio is an important indicator of a company's financial health. A high ratio indicates that a company has a significant amount of debt relative to its equity, which can be a cause for concern. On the other hand, a low ratio suggests that a company has a strong financial position and is less reliant on debt financing.