Measuring a Company’s Viability – Debt to Equity Ratio Explained
When a company’s viability and leverage is being analyzed and calculated there is a simple calculation that makes this clearer. This is debt to equity ratio explained. This ratio is taking the amount of the company’s assets and then calculating the shareholder’s equity with the total liabilities. This figure explains the percentage of debt verses assets being used to leverage finance for the company. This is an important figure when calculating a company’s viability in business.
The debt to equity ratio explained can also be used in personal finance for a single person. A person’s debt to equity ratio explained can look much like a company’s but in much simpler terms. This can be used to determine the amount of financial leverage a person has to borrow against when comparing to the amount of assets they have verses their debt. This determined a portion of a person’s credit worthiness. It is used in scoring a person’s credit when making purchases such as a house or a car. These large purchases require a person to have a certain amount of credit worthiness when borrowing money to fund the purchase.
The figure of debt to equity ratio explained should determine a corporation’s ability to safely borrow and still remain financially viable. This is the amount that a company should not go over when they borrow money to either keep a certain amount of cash flow to operate or to make purchases such as real estate or company assets. When determining this figure the liability is examined to determine the outstanding debt at the time of the analysis. The calculation also includes the shareholder’s equity that should be deducted from any assets the company owes. This will provide the true number that a company can safely borrow without being at risk for financial problems.
There are many reasons a company would want their debt to equity ratio explained. One of these reasons is if they want to borrow to fund projects, purchases to create cash flow. Other reasons can include determining their viability for selling the company. Many companies that have a low debt to equity ratio explained will be a more viable company for purchase. This type of company is worth more than one that has a high level of debt to equity ratio. This information is important for many reasons and should be analyzed for a company so they are aware of what their standing is.