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# Decoding ratios debt to equity, debt to asset, equity multiplier

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### Decoding ratios debt to equity, debt to asset, equity multiplier

1. 1. Decoding Ratios: Debt to Equity, Debt to Asset, Equity Multiplier
2. 2. You must agree that ratios play a significant role in analyzing the status of a business. Let us see three of such noteworthy ratios here and decode them.
3. 3. Solvency Ratios  Solvency Ratio is a umbrella term that covers all financial ratios that make a comparison between the capital and the borrowed funds of an owner.  Major solvency ratios include • Debt to Equity Ratio = (Total Debt / Total Equity) • Debt to Asset ratio = (Total Debt / Total Assets) • Equity multiplier = (Total Assets/ Total Equity)  Irrespective of the level of sales, organization must be able to fulfill its debt obligations, thus, high level of leverage makes business more prone to downturns in a business cycle  A higher percentage of equity is viewed as a measure of financial stability.
4. 4. 1. Debt to Equity Ratio  Debt to Equity ratio measures the long term solvency and the capital structure of a company.  It helps in figuring out the percentage of debt and equity in the balance sheet of a firm.  A greater percentage of shareholders equity shows excess of finance which safeguards the company's leverage.  Debt to Equity Ratio = (Total debt or liabilities)/ (Total Equity)
5. 5. 2. Debt to Asset Ratio  The long term solvency and the capital structure of a company is being judged by Debt to Asset Ratio.  It shows the percentage of debt in comparison to the assets of a company i.e. examines how many assets of a company are financed by debt.  Debt to assets ratio = (Total debt or liability) / (Total assets)
6. 6. 3. Equity Multiplier  Equity multiplier ratio helps in analyzing the financial leverage of a company.  It examines the use of debt and shareholder’s equity to purchase the assets that are held by a company.  Equity multiplier = Total Assets/Shareholder’s equity  Higher equity multiplier ratio shows that majority of assets are financed through debt.
7. 7. Du Pont analysis  Equity multiplier ratio is one of the major components of Du Pont analysis, which helps in calculating Return on equity.  Three different aspects viz. profitability, efficiency and the leverage of a company determine DuPont ROE.  ROE under Dupont Analysis = (Net income/sales) x (Total Assets/Total Equity) x (Net income/Total Equity)
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