Your Questions About Lower Debt Ratio

Thomas asks…

What’s wrong with a company exposing itself to a large amount of equity (low Debt/Equity ratio)?

richmama answers:

Shares become diluted and existing investors receive a smaller ownership portion with each additional share issued. Adding to the number of shares outstanding reduces the value of holdings of existing shareholders. In turn, the demand for the stock becomes lower and their stocks usually inch up. On a good day the stock may gain nothing but pennies or even untouched..

Maria asks…

Is it always good for debt ratio to be low and equity ratio to be high? Thank you very much.?

Ratio analysis

richmama answers:

Definitely, the higher the debt ratio the more you are borrowing of the total value. The high the equity ration the less you are borrowing of the total value. While there are some who would make an argument for leveraging to the hilt when interest rates are really low, I simply don’t agree with it. Debt at any interest rate is risk. Risk is necessary, but you should always keep debt to a manageable level and keep equity as high as possible.

Richard asks…

Debt/Equity Ratio vs.Current Ratio (10 points!!!) ?

If a business has a low current ratio yet a low debt/equity ratio, what would explain this?
My understanding: the business has high debt compare to assets, yet low compare to equity. How is this possible?? Can it be because of keeping a lot of retained earnings or a lot of shares outstanding (ie. higher equity)?

richmama answers:

The two debts are different

current ratio uses debt which is due in a short period of time, like your electric, phone bills

debt/equity uses long term debt, bonds, etc. Like your house mortgage

Mark asks…

Does it concern you that the USA has the third LOWEST debt/GDP ratio of the G8 nations?
“As of July 28, 2010, the “Total Public Debt Outstanding” was approximately 93% of annual GDP, ($13.258 Trillion) with the constituent parts of the debt being “Debt held by the Public” being approximately 60% of GDP ($8.63 Trillion) and “Intergovernmental Debt” standing at 32% of GDP ($4.55 Trillion). The United States has the third lowest Debt to GDP ratio of the G8 Nations (when using “Debt held by the Public” as the measure)”

You mean other G8 Nations have MORE debt than we do????

Can we all say “global meltdown?”
Lois, yes that surprised me, too. Hello…!?

richmama answers:

Yes, China is the only economy of any size that actually has a surplus. What happens when that surplus stops? No credit is what happens.

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