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It measures a company\u2019s debt to the value of its net assets, it is used to measure the extent to which a company is taking on debt for leveraging its assets. <\/p>
When the D\/E ratio is high it is considered highly risky, showing that the company has been aggressive in financing its growth with debt.<\/p>\n
If a lot of debt is used to finance growth, the company could potentially generate more earnings compared to without that financing. <\/p>
Shareholders should expect to benefit when the leverage increases earnings by a greater amount than the interest. <\/p>
And share values may decline when the cost of debt financing outweighs the increased income generated. The market conditions are responsible for variance in the cost of debt.<\/p>\n
Because they tend to be larger accounts the changes in long-term debt and assets have the greatest impact on the D\/E ratio in comparison to short-term debt. <\/p>
Other ratios can be used if the investors want to evaluate a company\u2019s short-term leverage and its ability to meet debt obligations that must be paid over a year or less.<\/p>\n
For example, an investor will use a cash ratio instead of a long-term measure of leverage such as the D\/E ratio if they need to compare a company\u2019s short-term liquidity or solvency.<\/p>\n
Cash ratio = cash+ marketable securities\/short term liabilities<\/b><\/em><\/p>\n <\/em>Or current ratio = short term assets\/short term liabilities<\/b><\/em><\/p>\t\t\t\t\t<\/div>\n\t\t\t\t\t\t<\/div>\n\t\t\t\t<\/div>\n\t\t\t\t\t\t<\/div>\n\t\t\t\t\t<\/div>\n\t\t<\/div>\n\t\t\t\t\t\t\t\t<\/div>\n\t\t\t\t\t<\/div>\n\t\t<\/section>\n\t\t\t\t