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

Business

Scenario:

While our profitability has been increasing, we can't ignore the mounting debts. The Board wants to prioritize paying off some of our financial obligations before investing in new projects.

Response:

We've deliberately reduced our debt-to-equity ratio this year to demonstrate our commitment to reduce our financial risk.

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.