Debt to Equity Ratio (D/E)
The debt-to-equity ratio (D/E) is a financial ratio indicating the comparative proportion of shareholders' equity and debt employed to finance a company's assets. In a close relation relation with leveraging, the ratio is also referred as Risk, Leverage or Gearing. The two portions are oftentimes taken from the business firm's balance sheet or statement of financial position, thus referred as book value, but the ratio may also be computed employing market values for both, if the company's debt and equity are publicly traded, or employing a combination of book value for debt and market value for equity financially.
Preferred shares can be regarded part of debt or equity. Attributing preferred shares to one or the other is partially a subjective decision but will also take into account the particular features of the preferred shares.
When employed to compute a company's financial leverage, the debt In general lets in only the Long Term Debt (LTD). Quoted ratios can even omit the current portion of the LTD. The composition of equity and debt and its influence on the value of the business firm is much debated and also described in the Modigliani-Miller theorem.
Financial analysts and stock market quotes will in general not include other types of liabilities, such as accounts payable, in spite of the fact that some will make adjustments to include or exclude identified items from the formal financial statements. Adjustments are sometimes also made to, for example, exclude intangible assets, and this will impact the formal equity; debt to equity (dequity) will thus also be affected.
Financial economists and academic papers will In general refer to all financial obligation as debt, and the statement that equity plus financial obligation equals assets is thus an accounting identity. Other explanation of debt to equity may not respect this accounting identity, and should be carefully compared.
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