Debt-to-equity aim (interpretation) (1 Viewer)

[Smile1]

Hey guys,

My teacher gave me homework where I am required to do information for each ratio under the following headings:

Ratio -
Formula -
Financial objective & statement the ratio links with -
What is it used for?
How do you interpret it?

The "How do you interpret it" is what I am having difficulties with. It refers to the aim, I.e. aim for Current ratio is 2:1.

Is there an aim for the debt-to-equity. I gather it would just be 1:1... Although I thought it would depend on business and having one debt to one equity probably isn't leaving the business at any advantage... so would it so too be 1:2?

Please help if anyone has information on this.

Thanks heaps guys

 

[Paige23]

Yeah, the way we have learnt how to answer that part of the question is to say "For every $1 of equity, the business has $(however much) of debt, making the business (high/low geared, whichever applicable)"

You have the right idea of saying 1:2, but remembering that everything is always in a ratio to one, it would be best writing it as 0.5:1

The business would be seen to be moderatley/high geared once the ratio gets over 1:1, depending of the business can afford it (a big business eg Crown Casino, can have a large debt, due to the large amount of equity they recieve etc)

I hope this helps a bit

 

[Smile1]

Hey,

Thanks heaps for that.
I was having troubles understanding because we got these new textbooks & they have changed the termonology & definitions also seem to vary to past HSC textbooks and other text books I've bought myself.

Under the subheading of Solvency;
Do you have two ratios, debt-to-equity and debt-to-assets?

 

[Failure_123]

That's one way of answering that question. You have paypal? i'm not kidding, there is other answers needed to get full marks. I obtained a 98 for business studies.

 

[Paige23]

Equity and assets are the same thing, so it is just total debt/total equityfor the solvency ratio (ps, it can also be called gearing, leverage of debt to equity, they're all the same thing).

Yeah, that'd be real confusing jumping from one textbook to another...anyway, I'm sure you'll survive, just think, there's only a few months of this left!!