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Finance Dictionary and Glossary of Investment Terms
Indicator of financial leverage. Compares assets provided by creditors to assets provided by shareholders. Determined by dividing long-term debt by common stockholder equity.
A measure of a company's financial leverage calculated by dividing long term debt by shareholders equity. It indicates what proportion of equity and debt the company is using to finance its assets.Note: Sometimes investors only use interest bearing long term debt instead of total liabilities.
The most recent quarter long-term debt divided by the most recent quarter common stock equity. The debt/equity ratio is a measure of the extent to which a firm''s capital is provided by owners or lenders. Aggressive companies often rely more heavily on debt than conservative companies. A greater reliance on debt can mean greater profitability for shareholders, but also greater risk in the event things go sour. Generally the debt/equity ratio should be 30% or lower, but as with most ratios, this one varies by industry. Companies in industries that aren''t very competitive or are subject to tight regulation can afford to carry more debt, as can companies whose markets tend to be reliable. Food makers, for instance, know that people have to eat. But even here, there are caveats. Cigarette companies were considered to be in a business with reliable demand and thus able to take on more debt, but the regulatory and legal climate is changing fast.