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This group of ratios calculates the proportionate contributions of owners and creditors to a business, sometimes a point of contention
between the two parties. Creditors like owners to participate to secure their margin of safety, while management enjoys the
greater opportunities for risk shifting and multiplying return on equity that debt offers.
Note: Although leverage can magnify earnings, it exaggerates losses.
| Common Shareholders' Equity | = Equity Ratio |
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| Total Capital Employed |
The ratio of common stockholders' equity (including earned surplus) to total capital of the business shows how much of the total
capitalization actually comes from the owners.
Note: Residual owners of the business supply slightly more than one half of the total capitalization.
| Debt + Preferred Long-Term | = Debt to Equity Ratio |
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| Common Stockholders' Equity |
A high ratio here means less protection for creditors. A low ratio, on the other hand, indicates a wider safety cushion (i.e.,
creditors feel the owner's funds can help absorb possible losses of income and capital).
If your business is growing, track this ratio for insight into the distributive source of funds used to finance expansion.
| Current + Long-Term Debt | = Debt Ratio |
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| Total Assets |
What percentage of total funds are provided by creditors? Although creditors tend to prefer a lower ratio, management may
prefer to lever operations, producing a higher ratio.
Times Interest Earned Ratio
Refer to "Coverage Ratios"
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