debt-to-equity-ratio

Vocabulary Word

Definition

The 'debt-to-equity-ratio' is a financial term that shows the relationship between a company's debt (funds borrowed) to the money invested in the company (equity). It measures how much debt the company is using to finance its assets relative to the value of shareholders' equity.

Examples in Different Contexts

In making investment decisions, the 'debt-to-equity-ratio' helps investors evaluate a company's risk level by showing how much debt is used to finance its operations relative to equity. An investor might explain, 'I prefer companies with a low debt-to-equity-ratio, as it suggests less risk and a more stable investment.'

Practice Scenarios

Accounting

Scenario:

We've had a demanding quarter, with significant investments made in new assets. It might be advisable to decrease our reliance on borrowed funds going forward.

Response:

Our current debt-to-equity ratio indicates that we've financed more with our own money than borrowed money.

Investment

Scenario:

The target company seems to have a strong balance sheet, with significant equity invested. But we still need to consider their future financial stability before buying a stake.

Response:

An improved debt-to-equity ratio will undoubtedly enhance the company's attractiveness as a less risky investment proposition.