Is a debt to equity ratio of 0.6 good?
In general, many investors look for a company to have a
If the ratio is below 1, the company has more assets than debt. Broadly speaking, ratios of 60% (0.6) or more are considered high, while ratios of 40% (0.4) or less are considered low. However, what constitutes a “good debt ratio” can vary depending on industry norms, business objectives, and economic conditions.
Generally, a good debt-to-equity ratio is less than 1.0, while a risky debt-to-equity ratio is greater than 2.0. But this is relative—there are some industries in which companies regularly leverage more debt.
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.
The lower value of the debt-to-equity ratio is considered favourable, as it indicates a reduced risk. So, if the ratio of debt to equity is 0.5, that means that the company has half its liabilities because it has equity.
Financial experts generally consider a debt-to-equity ratio of one or lower to be superb. Because a low debt-to-equity ratio means the company has low liabilities compared to its equity , it's a common characteristic for many successful businesses. This usually makes it an important goal for smaller or new businesses.
A good debt to equity ratio is around 1 to 1.5. However, the ideal debt to equity ratio will vary depending on the industry because 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.
What is a bad debt-to-equity ratio? When the ratio is more around 5, 6 or 7, that's a much higher level of debt, and the bank will pay attention to that. “It doesn't mean the company has a problem, but you have to look at why their debt load is so high,” says Lemieux.
31, 2023.
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 0.9 a good debt-to-equity ratio?
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.
The Debt/Equity ratio is certainly far from perfect! A low ratio of 0.26 means that the company is exposing itself to a large amount of equity. This is certainly better than a high ratio of 2 or more since this would expose the company to risk such as interest rate increases and creditor nervousness.
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.
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.
The debt to equity ratio shows a company's debt as a percentage of its shareholder's equity. If the debt to equity ratio is less than 1.0, then the firm is generally less risky than firms whose debt to equity ratio is greater than 1.0.
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.
Total debt on the balance sheet as of December 2023 : $135.61 B. According to Amazon's latest financial reports the company's total debt is $135.61 B. A company's total debt is the sum of all current and non-current debts.
Industry | Average debt to equity ratio | Number of companies |
---|---|---|
Household & Personal Products | 0.69 | 24 |
Industrial Distribution | 0.65 | 17 |
Information Technology Services | 0.59 | 53 |
Insurance Brokers | 1.16 | 12 |
A debt ratio between 30% and 36% is also considered good. It's when you're approaching 40% that you have to be very, very vigilant. With a threshold like that, you're a greater risk to lenders.
Ideally, financial experts like to see a DTI of no more than 15 to 20 percent of your net income. For example, a family with a $250 car payment and $100 of monthly credit card payments, and $2,500 net income per month would have a DTI of 14 percent ($350/$2,500 = 0.14 or 14%).
How is a debt ratio of 0.45 interpreted?
A debt ratio of 0.45 means that a firm has $0.45 of equity for every dollar of debt. A debt ratio of 0.45 means a firm has $0.45 of current liabilities for every dollar of current assets.
Generation | Average total debt (2023) | Average total debt (2022) |
---|---|---|
Millenial (27-42) | $125,047 | $115,784 |
Gen X (43-57) | $157,556 | $154,658 |
Baby Boomer (58-77) | $94,880 | $96,087 |
Silent Generation (78+) | $38,600 | $39,345 |
Generally, a mix of equity and debt is good for a company, and too much debt can be a strain on a company's finances. Typically, a debt ratio of 0.4 or below would be considered better than a debt ratio of 0.6 and higher.
The maximum acceptable debt-to-equity ratio for more companies is between 1.5-2 or less. Large companies having a value higher than 2 of the debt-to-equity ratio is acceptable. 3. A debt-to-equity ratio indicates that a company may not be able to generate enough cash to satisfy its debt obligations.
A debt-to-equity ratio of 0.8 means the firm has $0.80 of debt for every $1 of equity. A debt-to-equity ratio of 0.8 means the firm finances 80 percent of its assets with debt and the other 20 percent with equity.
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