Illustrate how the debt-to-equity ratio (total debt over total equity)
(distinct from the debt ratio) impacts the
The debt-to-equity ratio is one of the important financial indicators of the company. The ratio of 2:1 is said to be the ideal debt-to-equity ratio for a company. When a debt in a company increases then the financial leverage also increases thereby resulting in pushing the company to riskier side.
When the debt in a company increases the risk also increases. And the company is committed to paying fixed interest on a huge amount, which in turn decreases the profit that is to be distributed to equity holders. And the Return on Equity is formulae is dividing the profits available to equity holders by the total capital contributed by them.
Therefore, when the debt in a company increases it affects the debt-to-equity ratio and also the profits available to equity holders.
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