Exploring Real-World Examples of Debt-To-Equity Ratios

Introduction

Debt-to-Equity Ratio (DER) is a financial ratio that compares a company's total liabilities to its total shareholder's equity. It determines how much of a business's assets are provided by creditors and how much is provided through investments by the owners or shareholders. Understanding the real world examples of debt-to-equity ratios can provide greater insights into how different companies manage their financial liabilities.

Definition of Debt-to-Equity Ratios

Debt-to-Equity ratios are calculated by dividing total liabilities by total shareholder's equity. It can also be calculated by taking a company's total debt and dividing it by its total equity. For example, if a company has $30,000 in total liabilities and $10,000 in total equity, then the company's DER is calculated as (30,000 / 10,000) = 3.

Purpose of Understanding Real World Examples

Understanding real world examples of DER can provide important insights into how companies manage their finances. A low DER ratio indicates that a company is relying more on shareholder's equity than debt to finance their operations. A high DER ratio implies that a company is relying more heavily on debt and loans to finance their operations. Understanding different companies’s DER ratios can also help investors and other stakeholders assess a company’s financial health.

Apple Inc.

Apple Inc. is an American multinational technology company. It designs, develops, and sells consumer electronics, computer software, and online services. It is one of the world’s largest technology companies and is listed as one of the most valuable companies in the world.

What Is The Company's Debt-To-Equity Ratio?

Apple Inc.’s debt-to-equity ratio is 0.45. This ratio indicates that the company has a low level of debt relative to its shareholders' equity. This is a positive sign for the company, as it indicates that it is in good financial health and can pay back any debts it owes.

How Has This Ratio Changed Over Time?

Apple Inc.’s debt-to-equity ratio has decreased over time. Since 2005, the company’s ratio has decreased from 1.44 to 0.45 in 2019. This shows that the company has been able to effectively manage its debt obligations and has been able to reduce them over time.

The company’s decreasing debt-to-equity ratio also shows that it has been able to grow its earnings, increase its profitability, and create a strong balance sheet.

Amazon Inc.

What Is The Company's Debt-To-Equity Ratio?

Amazon Inc.'s debt-to-equity ratio is 0.16, meaning that the company has a small amount of debt compared to its equity. This ratio indicates that Amazon Inc. is a low-risk investment.

How Has This Ratio Changed Over Time?

Amazon Inc.'s debt-to-equity ratio has been steadily decreasing over time, from a high of 0.5 in 2018 to its current ratio of 0.16 in 2020. This suggests that the company has been taking steps to reduce its debt and become more financially secure.

The company has reduced its debt by paying off debt and by investing the proceeds from its stock offerings. Additionally, the company has continued to increase its revenues and profits, which has allowed it to pay off more debt, further lowering its debt-to-equity ratio.

Alphabet Inc.

Alphabet Inc. comprises Google and several related businesses, and is now the parent company for Google, YouTube, Waymo, DeepMind, Verily, and more. As of 2018, Alphabet had market capitalization of more than $723.5 billion, with operations across more than 50 countries.

What is the Company's Debt-To-Equity Ratio?

Alphabet Inc.’s current debt-to-equity ratio is 0.46, as of March 31, 2019. This ratio is a measure of how much debt a company has taken on in proportion to its total equity. A higher ratio indicates that a company has taken on more debt, while a lower ratio indicates more equity. Alphabet’s debt-to-equity ratio of 0.46 is higher than the industry average of 0.28. However, its ratio is low compared to some of its peers, such as Facebook Inc. (2.23) and Amazon.com Inc. (5.81).

How Has This Ratio Changed Over Time?

Alphabet Inc.’s debt-to-equity ratio has remained fairly stable over the past several years, falling from 0.50 in 2016 to 0.46 in 2019. This suggests that the company has been able to consistently manage its debt, while also maintaining a healthy balance of equity. Alphabet Inc.’s debt-to-equity ratio has consistently been lower than the industry average, which suggests that the company is more conservative and prudent with its financials than its competitors.

In general, Alphabet Inc. has been able to maintain a healthy balance of debt and equity over the past several years, as evidenced by its consistent debt-to-equity ratio. With its focus on prudent financial management and its low debt-to-equity ratio, Alphabet Inc. is well-positioned to weather potential economic downturns and remain financially stable.

Microsoft Inc.

Microsoft Inc. is an American multinational technology company headquartered in Redmond, Washington. It is one of the world’s largest software providers and one of the largest technology companies in terms of revenue.

Microsoft's debt-to-equity ratio is an important metric when considering the company's financial performance. In this chapter, we will analyze the current debt-to-equity ratio of Microsoft Inc., as well as how this ratio has changed over time.

What Is the Company's Debt-To-Equity Ratio?

As of June 30, 2020, Microsoft's total debt stood at $140.66 billion. The company's equity was $247.51 billion, giving it a debt-to-equity ratio of 0.57. This ratio indicates that the company has a relatively low amount of debt compared to its equity.

How Has This Ratio Changed Over Time?

Microsoft's debt-to-equity ratio has generally been trending downward over time, indicating that the company has been able to reduce its debt load relative to its equity. In the past five years, the company's debt-to-equity ratio has decreased from 0.68 in 2015 to 0.57 in 2020. This suggests that the company has been successful in reducing its debt burden in spite of its increasing equity.

Additionally, Microsoft's debt-to-equity ratio has remained fairly consistent over the past two years. This may indicate that the company has taken steps to reduce its debt levels, but has been hesitant to take on additional debt in the foreseeable future.

Walmart Inc.

When it comes to debt-to-equity ratios, Walmart Inc. stands among the heavyweights of the retail sector. As one of the world's largest retailers, Walmart has a current debt-to-equity ratio of 0.66, meaning that debt accounts for 66% of its total liabilities. This indicates a high degree of leverage that Walmart has employed to expand its business operations.

What Is The Company's Debt-To-Equity Ratio?

As of the most recent quarterly report, Walmart had total liabilities of $189.7 billion and total equity of $88.3 billion. This equates to a debt-to-equity ratio of 0.66, which is well above the industry average. This ratio reflects the large amount of debt that Walmart has taken on in order to fund its growth plans.

How Has This Ratio Changed Over Time?

When looking at the past five years, Walmart's debt-to-equity ratio has generally been on an upward trend, though it has been consistently above the industry average since 2018. During the 2020 fiscal year, it spiked above 1, reflecting a dramatic increase in leverage as Walmart faced increased financial pressure from the COVID-19 pandemic.

However, Walmart has since taken steps to reduce its debt burden and has seen its debt-to-equity ratio steadily decline throughout 2021. As of the most recent quarter, it stands at 0.66, which although still above the industry average, is the lowest that it has been since the start of 2020.

It is clear that Walmart has been actively managing its debt and has been able to reduce its leverage in recent months. This demonstrates the retailer's commitment to achieving a healthy balance sheet and sustainable financial position going forward.

Conclusion

Debt-to-Equity (D/E) Ratios are an important measure of companies’ debt levels, as they indicate how much of a company’s capital is debt-funded versus equity-funded. This metric is used extensively in focusing financial plans and company strategies, both in the short-term and the long-term. In this blog post, we have discussed the various types of Debt-to-Equity Ratios and how they can be useful in assessing a company’s debt levels. We discussed both absolute Debt-to-Equity Ratios, as well as relative Debt-to-Equity Ratios. We discussed the various ways in which the ratios can be employed in business decisions and the common benchmarks that companies use for benchmarking their Debt-to-Equity Ratios. We also discussed real-world examples from different industries, such as retail, automotive, banking, and telecom. Finally, we analysed the impact of such ratios on plan design.

Summary of Discussed Ratios

To summarise, there are three common types of Debt-to-Equity Ratios: the Absolute Ratio, the Relative Ratio, and the Intercompany Ratio. The Absolute Ratio reflects the company’s debt levels, while the Relative Ratio reflects the company’s debt levels in comparison to its peers. The Intercompany Ratio is used to measure the leverage of a group of companies that are related. Different industries also have different target ratios, which allows companies to compare their Debt-to-Equity Ratios with standard benchmarks.

Impact Of Ratios On Plan Design

Debt-to-Equity Ratios can also have a major impact on plan design. Companies use the ratios to evaluate their financial plans and strategies and to ensure that their debt levels are appropriate. A high Debt-to-Equity Ratio can indicate the need for a more conservative financial strategy, while a low Debt-to-Equity Ratio can indicate the need for more aggressive financial strategies. Companies can also use Debt-to-Equity Ratios to temper their investment and capital expenditures, as well as to prioritise the use of capital and debt repayment.

In conclusion, Debt-to-Equity Ratios are an integral part of any financial assessment and can be used to inform plan design and inform companies’ strategies. By understanding these ratios and keeping abreast of relevant data and industry benchmarks, companies can better plan for their financial future.