Sample Thesis Paper
The debt to equity ratio is calculated by dividing total debt by total equity of a company. Both debt and equity are components of a Balance Sheet. This ratio measures the proportion of debt borrowed by the company from lenders in comparison to the amount invested by the share holders or business owners.
The debt to equity ratio shares similarities with the total debt to total asset ratio. Like the latter, the former too helps analyze the company’s debt situation. However, the debt to equity ratio, as mentioned earlier calculates the proportion of debt in relation to equity, whereas the total debt to total asset ratio measures total debt and matches it to the total assets existing within a company. The debt to equity ratio is analyzed in a similar fashion to the total debt to total asset ratio. A lower debt to equity ratio signifies a better and less risky position for the company and a higher ratio means that the firm is riskier and managers will have to extract a greater amount of returns for that added risk in order to induce potential investors to venture forth and deploy their financial resources in the company. No rational investor will willingly invest his or her money in company with a high risk profile or a high debt to equity ratio if the returns are not greater. If two firms provide the same rate of return for an investor, the logical investor will invest in the company with the lower risk profile, everything else being equal.