Hi, This may not be relate to the CFA studies, but after studying CFA for something although i have not pass still (will be taking in june), i use some of the knowledge that i have learn to apply to the real world. Regarding about debt to equity ratios, in fact which is better? The total liabilities (current and long term) as the numerator divide by total equity or simply use long tern liabilities divide by equity? Which ans will give us a better overview of the company? And for this following question pls correct me if i’m wrong, cos this is what i think. Equity also consists of the shares that investors have purchase in the open market. I know that the recommendation for debt to equity is not more than 0.6. Lets say for example this company is not notice by many investors and therefore is shares are not purchase by investors and it may have the chance to contribute to low equity. And for this case calculating the debt to equity may have more than 1. Is this good? can i assume bcos its not notice there its debt to equity is high? thanks for reading my post.
Hi, Debt Equity is an indicator of solvency and leverage rather than liquidity , hence it would be better to have only long term debt in the numerator. Regards part 2 of your ques, lower equity and higher debt would indicate high financial leverage which can work both ways good or bad depending on how profitable the company is.