Financial Ratio

Financial proportionality A financial proportion is a ratio of two numbers of reported levels or flows of a club. It may be two financial flows categories divided by each other (profit margin, profit/revenue). It may be a level divided by a financial flow (price/ payment). It may be a flow divided by a level (return on loveliness or mesh/equity). The numerator or denominator may itself be a ratio Debt to equity ratio The debt to equity ratio (D/E) is a financial ratio, which is equal to an entitys total liabilities divided by shareholders equity. The two components are often taken from the firms ratio sheet (or statement of financial position), but they might alike be imagined using their market values if two the come withs debt and equity are publicly traded. It is used to calculate a companys financial leverage and indicates what proportion of equity and debt the company is using to finance its assets. The composition of equity and debt and its deflect on the value of the firm is much debated and also set forth in the Modigliani-Miller theorem. A high debt/equity ratio generally means a company has been aggressive in financing its growth with debt. This can result in volatile earnings as a result of the additional interest expense.

If a lot of debt is used to finance increased operations (high debt to equity), the company could potentially generate more earnings than it would have without this  away financing. If this were to increase earnings by a greater measurement than the debt cost (interest), then the shareholders benefit as more earnings are being spread around to the same add of shareholders. However, the cost of this debt financing may outweigh the return that the company generates on the debt through investment and business activities and become as well much for the company to handle. This might lead to bankruptcy, which would leave shareholders with nothing, so it is a delicate balance. This is what the leverage effect is about and what the... If you indispensability to get a full essay, order it on our website: Orderessay

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