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DEBT-TO-EQUITY RATIO
A business's debt-to-equity ratio is achieved by dividing
a company's total debt by the total equity. The resulting
figure is commonly used by lenders and investors in
determining the functionality of a business.
Specifically, if your business has too much debt, it will
be considered in poor operation, or 'high-risk'. Obtaining
financing will be
difficult if your company is labeled high-risk as a
result of too much debt. In addition, having too little
equity is often considered bad by lenders and investors.
A debt-to-equity ratio that is too low typically is
reflective of a company that is not successfully
utilizing its cash and utilizing its profits to obtain
business resources. This will likely be daunting to
investors because it will result in fewer profits being
dispersed to them.
A suitable debt-to-equity ratio is anything lower than
3:1. If your business's ratio is greater
than that, you may have a hard time obtaining financing
for your company. However, every industry is different.
The 3:1 formula is not realistic or accurate across the
board. For example, real estate companies will have a
debt-to-equity ratio that is much higher than 3:1.
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