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What Are the Implications of a High Debt-to-Equity Ratio on Business Operations?

When a business has a high debt-to-equity ratio (D/E), it means they borrow more money than they use from their own funds.

Here’s what that can mean for the business:

  • More Financial Risk: If the D/E ratio is above 2.0, it shows that the business is taking big risks by borrowing a lot.

  • Higher Interest Costs: If interest rates go up by just 1%, this can make the costs much higher for the business. This can lower the money they actually keep after paying expenses.

  • Lower Credit Ratings: Companies with a D/E ratio over 1.5 might get lower credit ratings. This makes it harder and more expensive for them to borrow money in the future.

Understanding how debt and equity work together is important. It helps us see how healthy a business is and if it can keep running well.

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What Are the Implications of a High Debt-to-Equity Ratio on Business Operations?

When a business has a high debt-to-equity ratio (D/E), it means they borrow more money than they use from their own funds.

Here’s what that can mean for the business:

  • More Financial Risk: If the D/E ratio is above 2.0, it shows that the business is taking big risks by borrowing a lot.

  • Higher Interest Costs: If interest rates go up by just 1%, this can make the costs much higher for the business. This can lower the money they actually keep after paying expenses.

  • Lower Credit Ratings: Companies with a D/E ratio over 1.5 might get lower credit ratings. This makes it harder and more expensive for them to borrow money in the future.

Understanding how debt and equity work together is important. It helps us see how healthy a business is and if it can keep running well.

Related articles