Debt to Equity Ratio Essay Example | Topics and Well Written Essays - 1000 words

Debt to Equity Ratio - Essay ExampleThis essay discusses thatthe calculation of the debt to comeliness ratio is as straightforward as its definition. The ratio is computed by taking an entitys total liabilities and dividing it by the lodges faithfulness. The total liabilities and rightfulness officed are got from the statement of financial position of the guild on discussion. A partnerships equity is the amount of capital the shareholders or owners of the business deport put in the business. It is determined by subtracting the total liabilities from the companys total assets. It is best if the debt to equity ratio is kept within a reasonable range. If the ratio is very high, it is an indication that the business elicit be in a financial distress and maybe in leverage problem where it potty find it had to offset its debtors. On the other hand, if the ratio is to low, it implies that the company is heavily relying on the entitys equity to finance its operations.According to t he report findingsloans acquired from lenders come with an interest payment, which must be paid together with the question loan amount. The advantage of financing a companys operation through debt finance is that the company can deduct the interest payments in its tax returns. On the other hand financing the companys operations through equity makes the company at an obligation to earn return and growing the shareholder wealth. Companys should therefore strike a balance between the debt and equity use to run the operations of their businesses.