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Entrepreneurs seek capital and lines of credit to fund their new or existing business. However, many business owners are unaware of how their current debt to equity ratio adversely influences their chances for securing funding.
A debt to equity ratio is a debt ratio used to measure a company's financial leverage, calculated by dividing a company’s total liabilities by its stockholders' equity. The D/E ratio indicates how much debt a company is using to finance its assets relative to the amount of equity.
The formula for calculating D/E ratios can be represented in the following way:
Debt - Equity Ratio = Total Liabilities / Shareholders' Equity
The result may often be expressed as a number or as a percentage.
This form of D/E may often be referred to as risk or gearing.
This ratio can be applied to personal financial statements as well as corporate ones, in which case it is also known as the Personal Debt/Equity Ratio. Here, “equity” refers not to the value of stakeholders’ shares but rather to the difference between the total value of a corporation or individual’s assets and that corporation or individual’s liabilities. The formula for this form of the D/E ratio, then, can be represented as:
D/E = Total Liabilities / (Total Assets - Total Liabilities)
Please enjoy this great video produced by Investopedia
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