D/E ratio (debt/equity ratio) is the third ratio sibling. It’s like the risk-averse middle child who can’t decide between a nice holiday or paying off student loans.
The D/E ratio focuses on the total debt of a company. A low D/E ratio means a company has lower risk with less chance of bankruptcy. But a high D/E ratio means a company has been aggressive in financing its growth (and could continue growing!). Just like student loans, there is no right time for a company to pay off their debt. The D/E ratio simply gives future investors a snapshot of the company’s current finances.
Tips and tricks
Debt doesn’t always have to be bad. Companies often need to borrow to grow and reach their full potential.