The debt-to-equity ratio establishes the relationship between a company’s total debts (liabilities) and the amounts invested and its earnings (shareholders’ equity).
For example, a company has $600,000 in total liabilities and $400,000 in shareholder equity, resulting in a debt-to-equity ratio of 1.5. A lender might compare this to the industry average to assess whether the company is carrying an appropriate amount of leverage.
Why it matters: It illustrates financial leverage; highly leveraged companies are riskier to lenders and more vulnerable to economic recessions.
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