Finance Formulas / July 18, 2018 / Rory Wise
The term "profit" may bring images of money to mind, but to economists, profit encompasses more than just cash. In general, profit is the difference between costs and revenue, but there is a difference between accounting profit and economic profit. The biggest difference between accounting and economic profit is that economic profit reflects explicit and implicit costs, while accounting profit considers only explicit costs.
Given that the debtequity ratio measures a company’s debt relative to the total value of its stock, it is most often used to gauge the extent to which a company is taking on debt as a means of leveraging (attempting to increase its value by using borrowed money to fund various projects). A high debtequity ratio generally means that a company has been aggressive in financing its growth with debt. Aggressive leveraging practices are often associated with high levels of risk. This may result in volatile earnings as a result of the additional interest expense.
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