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Investing and Money Glossary, terms and definitions.

Debt/Equity Ratio

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.

 

 

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