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

Debt to Equity Ratio - Essay Example This essay discusses that  the calculation of the debt to equity ratio is as straightforward as its definition. The ratio is computed by taking an entity’s total liabilities and dividing it by the company’s equity. The total liabilities and equity used are got from the statement of financial position of the company on discussion. A company’s equity is the amount of capital the shareholders or owners of the business have put in the business. It is determined by subtracting the total liabilities from the company’s 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 can be in a financial distress and maybe in leverage problem where it can 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 entity’s equity to finance its operations.  According to the report findings  lo ans acquired from lenders come with an interest payment, which must be paid together with the principal loan amount. The advantage of financing a company’s operation through debt finance is that the company can deduct the interest payments in its tax returns. On the other hand financing the company’s operations through equity makes the company at an obligation to earn return and increase the shareholder wealth. Company’s should therefore strike a balance between the debt and equity use to run the operations of their businesses.