If a company has a debt indicator defined by Debt/[Debt + Equity]=60%, then its Debt/Equity indicator is?

Question:

What is the Debt/Equity indicator of a company if its debt indicator is defined by Debt/[Debt + Equity]=60%?

Answer:

The Debt/Equity indicator of the company would be 1.5 or D.

Explanation:

Debt/Equity ratio is defined as a ratio of total debt to shareholders' equity of a company. When a company has a debt indicator defined by Debt/[Debt + Equity]=60%, it indicates that the Debt/Equity ratio is 1.5. This means that for every $1 of shareholders' equity, the company has $1.5 of total debt. This ratio is important for investors and analysts to assess the financial health and risk of a company.

To calculate the Debt/Equity ratio, you divide the total debt by the shareholders' equity. In this case, with a debt indicator of 60%, the Debt/Equity indicator is 1.5. This ratio provides insights into how much debt a company is using to finance its operations compared to the amount of equity.

Understanding the Debt/Equity ratio is crucial for investors to evaluate the company's financial leverage and risk. A higher ratio indicates that the company relies more on debt to finance its operations, which can be risky in times of economic downturns. On the other hand, a lower ratio signifies a lower risk since the company is less reliant on debt for its financing needs.