Companies with a higher debt to equity ratio are considered more risky to creditors and investors than companies with a lower ratio. Unlike equity financing, debt must be repaid to the lender. Since debt financing also requires debt servicing or regular interest payments, debt can be a far more expensive form of financing than equity financing. Companies leveraging large amounts of debt might not be able to make the payments.
Lack of performance might also be the reason why the company is seeking out extra debt financing. Here is how you calculate the debt to equity ratio. Simply stated, ratio of the total long term debt and equity capital in the business is called the debt-equity ratio.
It can be calculated using a simple formula:. Description: This financial tool gives an idea of how much borrowed capital debt can be fulfilled in the event of liquidation using shareholder contributions. It is used for the assessment of financial leverage and soundness of a firm and is typically calculated using previous fiscal year's data. A low debt-equity ratio is favorable from investment viewpoint as it is less risky in times of increasing interest rates.
It therefore attracts additional capital for further investment and expansion of the business. Service tax is a tax levied by the government on service providers on certain service transactions, but is actually borne by the customers.
It is categorized under Indirect Tax and came into existence under the Finance Act, Description: In this case, the service provider pays the tax and recovers it from the customer. Service Tax was earlier levied on a specified list of services, but in th. A nation is a sovereign entity. Any risk arising on chances of a government failing to make debt repayments or not honouring a loan agreement is a sovereign risk.
Description: Such practices can be resorted to by a government in times of economic or political uncertainty or even to portray an assertive stance misusing its independence.
A government can resort to such practices by easily altering. A recession is a situation of declining economic activity. Declining economic activity is characterized by falling output and employment levels. Generally, when an economy continues to suffer recession for two or more quarters, it is called depression.
Description: The level of productivity in an economy falls significantly during a d. It is always measured in percentage terms. Description: With the consumption behavior being related, the change in the price of a related good leads to a change in the demand of another good. Related goods are of two kinds, i. Take Apple or Google, both of which had been sitting on a large amount of cash and had virtually no debt.
Their ratios are likely to be well below 1, which for some investors is not a good thing. The calculation is most often used by bankers or investors deciding whether to give your company money. If the debt-to-equity ratio goes up, the perceived risk goes up.
How individuals manage accounts payable, cash flow, accounts receivable, and inventory — all of this has an effect on either part of the equation. Healthy companies use an appropriate mix of debt and equity to make their businesses tick. You have 1 free article s left this month. You are reading your last free article for this month.
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