Accounting Ratio

finance a la shmoop what is the debt to equity ratio? well simply put this ratio

answers the question who owns the company like if the debt to equity ratio

is high like there's tons of debt and very little equity well, then

essentially the bank or whoever the lenders are owned the company or at [Assets transfer to bank]

least the lion's share of the assets comprising it the opposite is true as

well of course and you can imagine a well-heeled company with tons of cash

and other assets like land and oil wells and Technology IP and no debt well they

could have a debt to equity ratio of zero so why do you even track this kind

of ratio well when companies are young they tend to not have tons of equity and

over time as they grow and get good at whatever it is they do they will [Clock rapidly ticks forward]

accumulate valuable assets like cash which are tracked as equity or

shareholders equity on the balance sheet that lives right here think about it if [Balance sheet appears]

this side is assets and this side is liabilities well if you're subtracting

liabilities from assets and you still have a lot of assets left over that's a

good thing and that line is tracked right here in the shareholders equity [Shareholders equity highlighted on balance sheet]

line ..........

you have a company with two billion dollars in debt at 5% interest costing a

hundred million bucks a year to rent if the company's shareholders equity is

just 50 million dollars well, the company is essentially owned

predominantly by its debt holders or lenders should something go wrong even a [A bank vault full of money]

little bit wrong well the company will go bankrupt the debt holders would own all

that equity and well spin this around and if the company's equity comprises 10

billion dollars of cash and a bunch of other assets for a total of 20 billion

of equity well then you can imagine the debt to equity ratio of just 10% that's

the equity holders of the company, they'll sleep like babies [Man taking a nap]