The debt to equity ratio of a company is simply its level of debt (any type of borrowed money - from bank loans to bonds issued by the company) divided by equity (the shareholders' money in the business). Expressed as a percentage, this gives the companies 'gearing'.A company with a high level of debt will have a high debt-to-equity ratio, and hence be 'highly geared'.
A high level of gearing helps companies to produce better returns for shareholders when times are good, but in bad times, the highly geared are saddled with having to pay interest on their debt. Those which have chosen a high level of equity finance instead of debt, on the other hand, are not obliged to pay out - dividends are discretionary - and can often weather bad times better.
Subscribe to MoneyWeek
Subscribe to MoneyWeek today and get your first six magazine issues absolutely FREE
Sign up to Money Morning
Don't miss the latest investment and personal finances news, market analysis, plus money-saving tips with our free twice-daily newsletter
Don't miss the latest investment and personal finances news, market analysis, plus money-saving tips with our free twice-daily newsletter
-
8 of the best properties for sale with communal gardensThe best properties for sale with access to communal gardens – from an apartment in a listed building opposite London’s Hyde Park, to a wing of a mansion with access to 180 acres of parkland in Henley-upon-Thames
-
The five insurance policies you should haveSome insurance cover will be more important than others. We look at five insurance policies you may need to have to make sure you aren’t caught out in an emergency
