Also known as ‘leverage,’ the debt-to-equity ratio indicates the relative proportion of a company’s debt to total shareholder equity. Given that debt is looked at relative to shareholder equity, the debt-to-equity ratio is often given greater consideration than the debt ratio for determining leverage and risk. Similar to debt ratio, a lower debt-to-equity means that a company has less leverage and a stronger equity position. Continue reading...
In mechanics, gears are used to increase torque and to translate the force to other areas. In finance, a gearing ratio is a term referring the amount leverage being used, compared to the amount of equity. A high gearing ratio is almost the same as a high debt-to-equity ratio. The gearing ratio is computed in a slightly different manner. Gearing is another word for leverage. High amounts of debt can spell trouble for a company down the road, and investors are wise to consider that. Continue reading...
A company might use this maneuver in order to keep their debt to equity levels in check. The most frequently used types of off-balance-sheet-financing are joint ventures, research and development partnerships, and operating leases. Continue reading...
Debt ratios give a relative picture of a company’s ability to repay debts, make interest payments, and meet other financial obligations. They generally compare the level of debt in a company to the level of assets. Debt ratios are key for investors and particularly creditors, to determine the overall level of financial risk faced by a company. Debt ratios that increasingly turn unattractive can serve as “canaries in a coal mine” that a company is in danger of bankruptcy or default. There are several types of debt ratios, such as debt-to-equity, debt-to-capital, cash flow to debt, and so on. Continue reading...
Comparing operating cash flow to the size of a company’s debt obligations can give investors and analysts an idea of how capable a company is of paying of its debts. This ratio compares the size of a company’s cash flow from operations to the size of its debt, in an effort to get an idea of how capable a company is of paying off its debt obligations, and how long it would take if all cash flow were diverted to debt service. Continue reading...
The debt ratio measures a company’s total debt to total assets. It is the simplest calculation available for determining how indebted a company is on a relative basis. The debt ratio is crucial for determining a company’s financial standing, and should be considered by potential investors. To calculate the debt ratio, one only needs to divide total liabilities (i.e. long-term and short-term liabilities) by total assets. Continue reading...
A company's balance sheet gives a picture of how all the assets, liabilities, and equities of the company "balance out." The basic accounting equation is Total Assets = Total Liabilities + Equity, and a Balance Sheet is going to detail these parts to show how everything adds up at the time of the report. With things equal on both sides of the equation, the company's books are balanced, the same way someone might go back through the carbon copies of checks they've written and "balance the checkbook" to make sure all checks written have been accounted for. Continue reading...
The debt-to-capital ratio is a measure of a company’s leverage that looks at total debt compared to total capital (shareholder equity + debt). This measure of leverage is not a globally accepted accounting practice, therefore it is important for analysts to learn exactly what is being included by the company as their debt and equity in calculating the ratio. Generally speaking, a higher debt to capital ratio indicates that the company is financing more of its operations and needs through the debt markets versus with equity. Comparing debt-to-capital ratios amongst companies within the same sector or industry can be a useful exercise. Continue reading...
The Equity Multiplier is a number used to compare companies, arrived at by dividing total assets by owner’s equity, and it gives an idea of what proportion of the company’s assets have been financed through equity vs debt. In general a low Equity Multiplier is a good sign because it means that a higher proportion of equity has been used to acquire assets, as opposed to funding assets with debt. However, the absence of significant debt could mean that the company lacked the credit rating to issue debt or take out loans. Continue reading...
The cash flow to debt ratio measures a company’s operating cash flow versus its total debt. It is a useful tool for measuring a company’s ‘coverage,’ which looks at how well equipped a company is to meet its ongoing debt obligations (interest payments, for example) based on the amount of cash it generates through sales/service. There are different methodologies for calculating the ratio, but the most conservative are using free cash flow as the numerator and all redeemable debt (short-term, long-term, preferred stock) as the denominator. Continue reading...
Cash flow after taxes (CFAT) is nearly the same thing as EBITDA, but with taxes left in. One way to arrive at Cash Flow After Taxes is to take the net income of the business and add in interest, amortization, depreciation and other non-cash expenses. This is one item away from the formula for EBITDA, which also adds tax back in to arrive at the Earnings Before Interest, Taxes, Depreciation and Amortization. Continue reading...
When a company “deleverages,” it means it is attempting to shrink the amount of debt on its books relative to its assets. In some cases the act of deleveraging requires a company to sell-off/liquidate key assets in order to pay down debt, which ultimately means downsizing as well. A company may choose to deleverage as a strategic tactic, but often times they are forced to as a result of economic circumstances. Continue reading...
Capital structure gives a framework for a company’s makeup and how it finances its operations, because it includes long and short-term debt plus common and preferred equity. Capital structure is a mix of a company's long-term debt, specific short-term debt, common equity and preferred equity. Often times, investors will want to look at a company’s debt-to-equity ratio as a telltale of what their capital structure is. The higher the debt-to-equity ratio, the more that particular company is borrowing to finance operations versus using cash flow or assets on hand. Continue reading...
A company may reinvest earnings instead of paying out dividends. These earnings do not necessarily sit in a retained earnings account, but are used to improve the business and make it more profitable. This could even include paying off debt. Retained earnings is found in the Shareholder’s Equity portion of a company’s balance sheet. Despite the fact that earnings have not been dispensed to them in the form of dividends or share buybacks, shareholders will see the value of their stock appreciate when earnings are retained and used to grow the business. Continue reading...
Return on Equity refers to the return on shareholder’s equity, which is like looking at the compounding effects of profits. Shareholder’s equity, in the standard accounting equation, is the amount of assets and retained earnings in a company over and above the company’s liabilities. Return on Equity is a ratio which divides the net income of a company by the total shareholder’s equity in a company, which is effectively looking at the profitability of the profits of a company. Continue reading...
Solvency ratios come in several flavors, but they all seek to shed light on a company’s ability to pay its long-term debt obligations. There are several types of what is known as solvency ratios. Some examples of solvency ratios include debt-to-equity, debt-to-assets, interest-coverage ratio, the quick ratio, the current ratio, and so forth. These are meant to be metrics for a company’s ability to meet its debt obligations through various market conditions. The quick ratio, for instance, can reveal whether the current-year liabilities (payables) of a company are covered by the current year cash and receivables, or whether the company will depend on other sources such as inventory liquidation to meet this need. Continue reading...
In the standard accounting equation, when all company liabilities are subtracted from company assets, the remainder is called shareholders equity. What this means is that in the event that the company were liquidated, all debts would be serviced first, including bonds issued by the company, and the remaining balance would be divided amongst shareholders. If a company has a respectable debt-to-equity ratio, it can improve the appeal of a company’s stock and lead to a higher market price for the shares. Continue reading...
The capitalization ratio measures a company’s leverage, or the amount of long-term debt it holds relative to long-term debt + shareholder equity. Essentially, it is a measure of how capitalized a company is to support operations and growth. Continue reading...
Unlevered beta is crucial for investors and analysts assessing a company’s market risk independent of its debt. This article breaks down unlevered beta’s definition, importance in equity valuation, and how it enhances trading strategies by isolating asset-based risk. Dive in for a deeper understanding of this essential financial metric and how AI-driven tools like Tickeron’s A.I.dvisor can refine your market insights. Continue reading...
The operating cash flow ratio, or OCF ratio, is used to measure whether a company’s cash flows are sufficient to cover current liabilities. It essentially measures how many times a company can use cash flow from operations to cover debt expenses. It can be measured by dividing a company’s cash flow from operations by its current liabilities. Companies with high (relative to their peers or other companies in the sector OCF ratios are generally in good financial health, meaning they can adequately cover ongoing liabilities with cash flow from operations. Continue reading...