why “In either a profit or loss situation, leverage ratios will be lower under the equity method, because with consolidation, equity is the same, but liabilities are larger.” I thought in some case, under consolidation method, the equity is lower and liability is the same, which gives higher D/E ratio. For example, in equity method, an acquisition by cash of the company for $50 million, the current asset reduced by $50 million, but the long term asset increased by $50 million. D/E not change the same thing, in consolidation method, the total asset reduced by $50 million , so the equity reduced, and liability not changed. which lead to a higher D/E ratio. Thanks.
At the origination of investment things wont change. Changes in D/e will happen over the years as the earnings from the subsidiary affect liabilities and equity portions differently in the two methods.