What is Debt to Equity Ratio?

Despite how intimidating the term sounds, debt to equity ratio is a lot easier to understand than you might imagine. Sure, banks and investors toss the term around in a way that may have you sinking in your seat but it’s really not that complex, they just want you to think that it is! There are quite a few elements that are used by investors who are trying to determine which stocks will offer them the greatest return on their investment. These are the stocks that they want to add to their personal portfolio. A company’s debt to equity ratio just happens to be one of these elements. Debt to equity ratio basically measures the leverage that a company has. This is a good indication of their solvency, which is how much total liabilities are exceeded by total assets. If the number is negative, the company isn’t a good risk, if it’s positive, the company is very attractive (from the investment standpoint). Financial institutions generally use the debt to equity ratio not only to determine if the company is a sound investment but also to decide an interest rate that should be offered. A company with a high ratio will traditionally be required significant repayment against the debt because of the risk the lender is taking.