Question

A business has total assets of $50,500. Its total debt is $10,050. Calculate the debt/equity ratio and explain what it means in context.

Answer 1

Total asset = Total debt + Total equity

50,500 = 10,050 + equity

Equity = 50,500 - 10,050

= $ 40,450

Debt / Equity = 10,050 / 40,450

= 0.2485

The debt-to-equity ratio is a financial ratio indicating the relative proportion of equity and debt used to finance a company's assets. As per the ratio calculated above, the firm is in a healthy position and can take up more leverage moving forward. This is because debt is low as compared to equity. Taking up more debt in future will help the firm to get more funding and reduces the taxes to be paid by it. But this is applicable only up to a certain limit.

To conclude, the firm is in healthy financial position at the present.