What is Long Term Debt to Equity Ratio
Long term debt to equity ratio is a financial ratio that compares the company’s leverage between the total long-term debt and the company’s equity. The long term debt to equity ratio reflects how much the company taking leverage compared to the shareholder’s equity.
The long term debt to equity ratio (LTD/E) is calculated by dividing total long-term liabilities by the shareholder’s equity. The ratio indicates the value of dollars of borrowed funds for every dollar invested by investors Therefore, the LTD/E ratio of 1.0 means the company’s long-term debt is exactly equal to the shareholder’s equity.
Long term debt to equity ratio provides insight into how a company finances its core business (using both equity and debt financing) by comparing its long-term debt with its equity. This ratio is sometimes used to compare a company’s level of leverage to that of its competitors to see if the level of leverage is reasonable.
A higher LTD/E ratio means greater credit risk due to greater relative reliance on the company liabilities. A low LTD/E ratio is maybe a good long term debt to equity ratio but it’s not necessarily a positive sign, as the company may be overly reliant on equity financing, which is more expensive than debt; a reluctance to increase debt could result in the company missing out on growth opportunities. Plans to expand the fund, as well as the lack of benefit from a “tax shield” from interest expense.
Leverage refers to the amount of debt incurred to invest and obtain higher returns, while debt capital refers to debt along with total capital, or represents a percentage of a company’s debt financing.
Long Term Debt to Equity Ratio Formula & Calculation
Long term debt to equity ratio can be calculated by dividing the company’s total long-term liabilities by the company’s equity, or the following long term debt to equity ratio formula:
LTD/E = Long-term debt / Shareholder’s equity
For example, let’s say the Feriors company had the following financial results for last year:
- Total long-term debt of $100
- Total equity of $600
LTD/E ratio = 100 / 600 = 0.17 (or 17%)
From the example, this means the company borrowed 10 cents for each dollar of shareholders’ equity.
FAQs
Long term debt to equity ratio measures the company’s leverage between the total long-term debt and the company’s equity, to reflect how much the company taking leverage.
Long term debt to equity ratio can be calculated by dividing the company’s total long-term liabilities by the company’s equity, or the following formula: TD/E ratio = Long-term debt / Shareholder’s equity
A low LTD/E ratio is maybe a good long term debt to equity ratio but it’s not necessarily a positive sign, as the company may be overly reliant on equity financing.
