DEBT TO EQUITY RATIO:
Total Debt = 193,073
Total Equity = 553,907
Ratio = .35
The Debt to Equity Ratio is the ratio that compares the amount invested in the business by creditors versus the amount invested by owners.When securing bank financing, this is an important ratio. Many banks will have a policy that will prevent them from loaning to a company if this ratio goes beyond certain levels. In the example that was given, the .35-to-1 ratio is extremely low. This may indicate that the owners of the business are not taking advantage of the availability of borrowing for possible business expansion or other purposes.
Most small businesses will have a 3-to-1 or larger ratio. This may be a result under-funding by the owners.
As this ratio gets larger and larger, it may be an indication that the company may have difficulty paying its debt and is in trouble.
Source: Harvey A. Goldstein, CPA , Granville Publications
Total Debt = 193,073
Total Equity = 553,907
Ratio = .35
The Debt to Equity Ratio is the ratio that compares the amount invested in the business by creditors versus the amount invested by owners.When securing bank financing, this is an important ratio. Many banks will have a policy that will prevent them from loaning to a company if this ratio goes beyond certain levels. In the example that was given, the .35-to-1 ratio is extremely low. This may indicate that the owners of the business are not taking advantage of the availability of borrowing for possible business expansion or other purposes.
Most small businesses will have a 3-to-1 or larger ratio. This may be a result under-funding by the owners.
As this ratio gets larger and larger, it may be an indication that the company may have difficulty paying its debt and is in trouble.
Source: Harvey A. Goldstein, CPA , Granville Publications