| Chapter: | Reading | Topic |
Southern Corp. has a debt-to-equity ratio of 1.75, and total assets of $275 million. Southern is considering issuing another $20 million of debt and another $20 million of equity. What will be Southern's debt-to-equity ratio after the issuance?
| Solvecy ratios | |
|---|---|
| Long-term debt-to-equity ratio |
Total long-term debt
/
Total equity
|
| Debt-to-equity ratio |
Total debt
/
Total equity
|
| Total debt ratio |
Total debt
/
Total assets
|
| Financial leverage ratio |
Total assets
/
Total equity
|
The debt-to-equity (D/E) ratio measures a company's level of risk for lenders and investors by comparing the proportion of debt and equity used in financing its activities. The ratio is calculated as total debt (eg, bonds, notes payable) divided by total equity (eg, common stock, retained earnings).
The various components of the D/E ratio are reported on the balance sheet. Therefore, the values used in calculating the D/E ratio can be obtained from the accounting equation (Assets = Liabilities + Shareholders' equity).
In addition, the D/E ratio changes with increases (ie, issuance) and decreases in total debt or equity. Since the D/E ratio is a proportion of two numbers, any changes (whether equal or unequal) to both the numerator and denominator change the ratio.
Things to remember:
The debt-to-equity (D/E) ratio is calculated as total debt divided by total equity. Any increase or decrease in an entity's debt and/or equity changes the D/E ratio.
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