Finance Formulas / July 17, 2018 / Alyvia French
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.
The higher the debt ratio, the more leveraged a company is, implying greater financial risk. At the same time, leverage is an important tool that companies use to grow, and many businesses find sustainable uses for debt.
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