Decoding ratios debt to equity, debt to asset, equity multiplier
Decoding Ratios: Debt to
Equity, Debt to Asset,
You must agree that
ratios play a
significant role in
analyzing the status
of a business.
Let us see three of
ratios here and
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
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)
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
Debt to assets ratio = (Total debt or liability) / (Total assets)
3. Equity Multiplier
Equity multiplier ratio helps in analyzing the financial leverage of a
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.
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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