debt-equity ratio

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A ratio used to examine the financial structure or gearing or leverage of a business. The long-term debt, normally including preference shares, of a business is expressed as a percentage of its equity. A business may have entered into an agreement with a bank that it will maintain a certain debt-equity ratio; if it breaches this agreement the loan may have to be repaid. A highly geared company is one in which the debt is higher than the equity, compared to companies in a similar industry. A highly geared company offers higher returns to shareholders when it is performing well but should be regarded as a speculative investment. The debt-equity ratio is now sometimes expressed as the ratio of the debt to the sum of the debt and the equity.

Subjects: Financial Institutions and Services — Accounting.

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