Ratios: Debt to Equity Ratio definitions Flashcards
Ratios: Debt to Equity Ratio definitions
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Debt to Equity Ratio A measure comparing total liabilities to total equity, indicating how a company's assets are financed between debt and shareholder investment. Leverage Ratio A financial metric assessing the extent to which a company uses borrowed funds relative to other sources of capital. Liabilities Obligations or debts owed to external parties, representing claims against a company's assets. Equity Ownership interest held by shareholders, representing residual value after liabilities are subtracted from assets. Assets Resources owned by a company, including cash, inventory, property, and equipment, used to generate value. Financial Leverage The use of borrowed funds to increase the potential return on equity, often increasing both risk and reward. Interest Expense Mandatory payments made to lenders for the use of borrowed funds, regardless of company profitability. Dividends Distributions of profits to shareholders, which can be deferred or omitted at management's discretion. Risk The potential for financial loss or instability, often heightened by increased reliance on debt financing. Debt Ratio A metric comparing total liabilities to total assets, distinct from the debt to equity ratio. Shareholders Individuals or entities owning equity in a company, entitled to residual claims and potential dividends. Numerator The top part of a ratio, representing the value being compared, such as total liabilities in the debt to equity ratio. Denominator The bottom part of a ratio, serving as the basis for comparison, such as total equity in the debt to equity ratio. Fixed Expense A cost that must be paid regularly, such as interest on debt, regardless of business performance. Loan Borrowed funds that must be repaid with interest, contributing to a company's liabilities and financial leverage.
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