Is 1.4 a good debt-to-equity ratio?
Many investors prefer a company's debt-to-equity ratio to stay below 2—that is, they believe it is important for a company's debts to be only double their equity at most. Some investors are more comfortable investing when a company's debt-to-equity ratio doesn't exceed 1 to 1.5.
When it comes to debt-to-equity, you're looking for a low number. This is because total liabilities represents the numerator of the ratio. The more debt you have, the higher your ratio will be. A ratio of roughly 2 or 2.5 is considered good, but anything higher than that is considered unfavorable.
With a debt to equity ratio of 1.2, investing is less risky for the lenders because the business is not highly leveraged — meaning it isn't primarily financed with debt.
What is a good debt-to-equity ratio? Although it varies from industry to industry, a debt-to-equity ratio of around 2 or 2.5 is generally considered good.
A ratio greater than 1 implies that the majority of the assets are funded through debt. A ratio less than 1 implies that the assets are financed mainly through equity. A lower debt to equity ratio means the company primarily relies on wholly-owned funds to leverage its finances.
Key Takeaways
The debt-to-equity ratio is calculated by dividing a corporation's total liabilities by its shareholder equity. The optimal D/E ratio varies by industry, but it should not be above a level of 2.0.
Whether 1.25 is good largely depends on the industry in which the company operates. If you're in a capital intensive industry, then 1.25 may be considered a low debt to equity ratio. But if other companies don't have much debt, 1.25 might be high.
Generally, a good debt ratio is around 1 to 1.5. However, the ideal debt ratio will vary depending on the industry, as some industries use more debt financing than others. Capital-intensive industries like the financial and manufacturing industries often have higher ratios that can be greater than 2.
A debt-to-equity ratio of 1.5 would indicate that the company in question has $1.50 of debt for every $1 of equity. To illustrate, suppose the company had assets of $2 million and liabilities of $1.2 million. Since equity is equal to assets minus liabilities, the company's equity would be $800,000.
Key takeaways
A good debt-to-income ratio is less than or equal to 36%. Any debt-to-income ratio above 43% is considered to be too much debt.
Is 0.4 debt to equity ratio good?
In general, many investors look for a company to have a debt ratio between 0.3 and 0.6. From a pure risk perspective, debt ratios of 0.4 or lower are considered better, while a debt ratio of 0.6 or higher makes it more difficult to borrow money.
Generally speaking, a D/E ratio below 1 would be seen as relatively safe, whereas values of 2 or higher might be considered risky. Companies in some industries, such as utilities, consumer staples, and banking, typically have relatively high D/E ratios.
Yes, a D/E ratio of 50% or 0.5 is very good. This means it is a low-debt business and the company's equity is twice as high as its debts.
That said if the D/E ratio is 1.0x, creditors and shareholders have an equal stake in the company's assets, while a higher D/E ratio implies there is greater credit risk due to the higher relative reliance on debt.
Generally, a lower ratio is better, as it implies that the company is in less debt and is less risky for lenders and investors. A debt-to-equity ratio of 0.5 or below is considered good.
If your debt ratio does not exceed 30%, the banks will find it excellent. Your ratio shows that if you manage your daily expenses well, you should be able to pay off your debts without worry or penalty. A debt ratio between 30% and 36% is also considered good.
A good debt-to-equity ratio is generally below 2.0 for most companies and industries. To lower your company's debt-to-equity ratio, you can pay down loans, increase profitability, improve inventory management and restructure debt.
Good debt-to-equity ratio for businesses
Many investors prefer a company's debt-to-equity ratio to stay below 2—that is, they believe it is important for a company's debts to be only double their equity at most. Some investors are more comfortable investing when a company's debt-to-equity ratio doesn't exceed 1 to 1.5.
D e b t t o E q u i t y r a t i o = T o t a l l i a b i l i t i e s T o t a l E q u i t y. A value of $1.75, therefore, indicates that for every dollar of equity, a firm uses $1.75 in debt to finance its assets. This ratio indicates that the business has more credit financing than the owner's financing.
If a company has a ratio of 1.25, it uses $1.25 in debt financing for every $1 of debt financing. Understanding the debt to equity ratio in this way is important to allow the management of a company to understand how to finance the operations of the business firm.
What is a good debt-to-equity ratio for banks?
Industry | Typical Debt to Equity Ratio Range |
---|---|
Financial Services (Banks) | 4.0 – 8.0 |
Telecommunications | 1.0 – 2.5 |
Industrial Manufacturing | 0.4 – 1.0 |
Consumer Discretionary (Retail) | 0.5 – 1.5 |
Defining a High Debt-to-Equity Ratio
For example, if your small business has $400,000 in total liabilities and $250,000 in total stockholders' equity, your debt-to-equity ratio is 1.6. This means you use $1.60 in debt for every $1 of equity, or your debt level is 160 percent of your equity.
Using the debt-to-equity ratio, their calculation looks like this:Debt-to-equity ratio = $300,000 / $125,000Debt-to-equity ratio = 2.4The company's debt-to-equity ratio is 2.4, which means its debt is considerably higher than its assets, making it less likely for lenders to approve a loan.
Debt-to-equity ratio values tend to land between 0.1 (almost no debt relative to equity) and 0.9 (very high levels of debt relative to equity). Most companies aim for a ratio between these two extremes, both for reasons of economic sustainability and to attract investors or lenders.
In general, if your debt-to-equity ratio is too high, it's a signal that your company may be in financial distress and unable to pay your debtors. But if it's too low, it's a sign that your company is over-relying on equity to finance your business, which can be costly and inefficient.
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