How to use the EIA oil report in trading The content of the article What is an EIA report What data is published in the report How to use the report in trading Long term trading Short term trading Conclusion In this review, we will consider the weekly EIA report on the state of the oil industry, which has a strong influence on black gold quotes. Many traders closely follow his publications and use the information received when trading. What is an EIA report The Energy Information Administration, EIA, is a division of the US Department of Energy established in 1977. It is responsible for the objective collection of energy data, analysis and economic forecasts. Various reports are regularly published that provide information on energy-related topics. For example, reports on energy stocks, demand and prices. The United States is not only a major oil consumer (approximately 20% of world consumption), but also a leading oil producer. The balance of supply and demand in the US gives a rough ...
Debt to Equity multiplier: what the company's debts say
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Debt to Equity multiplier: what the company's debts say
The content of the article
How to calculate Debt to Equity
What Debt to Equity Metrics Say
Which Debt to Equity indicator is optimal
What are the pros and cons of Debt to Equity
Conclusion
There are many tools for analyzing companies - for example, multiples. Today we will look at one of them - Debt to Equity ratio or Debt / Equity.
It shows the ratio of the company's equity to borrowed capital. In simple terms: this is the company's debt divided by equity. Thus, it helps to understand what the company's assets are made up of. In some cases, Debt to Equity is referred to as financial leverage.
The multiplier is useful for the investor to determine the financial condition of the company he is interested in at this stage, whether it will be able to develop in the near future and whether it will bring profit.
How to calculate Debt to Equity
Calculation formula:
Debt to Equity Ratio = Liabilities / Assets
Company assets are all funds owned by an organization.
Liabilities - borrowed funds of the company (credits, loans, debts).
Short-term liabilities are used to cover cash gaps. Return within a year, which increases their "value".
Long-term liabilities are used to implement large-scale projects of the company. Return within a few years, which reduces their "cost". In other words: taking into account inflation, from the moment of taking until the moment of repayment of the debt, the purchasing power of borrowed funds decreases.
Data on the assets and liabilities of the company can be found in its financial statements, in the liability section of the balance sheet.
It is important to note that a company's debts are not always a negative factor. Thanks to borrowed funds, a company can restructure, develop, master new technologies, and expand its business. All this in the long run can lead to increased profits. In short: even successful giant corporations occasionally take out loans to grow their businesses.
What Debt to Equity Metrics Say
Equal to zero - the company does not use borrowed funds - only its own.
A firm with such Debt to Equity does not use loans, and this is not always a positive thing. It can be concluded that financial activities are carried out carefully and the company may lose profit in the future. As a rule, such organizations develop slowly, but have stability in the market. The investor's invested funds will bring a modest but stable profit.
Greater than zero - reports the use of borrowed funds in any amount relative to equity.
Companies with this Debt to Equity use borrowed funds and can potentially increase profits. At the same time, it is necessary to know how borrowed funds are spent. Perhaps the company is covering old debts and driving itself into an even greater debt hole. But, as a rule, firms use borrowed capital rationally.
More than one - the amount of borrowed funds of the company is greater than its own capital.
If the company does not have enough funds to pay off large financial obligations, it may end up in bankruptcy.
Which Debt to Equity indicator is optimal
It depends on the sector in which the company operates. The conditionally optimal Debt to Equity is considered to be 0.5–0.7. This value indicates that the company correctly uses financial leverage and has development prospects. In exceptional cases, a value equal to 1 is considered conditionally optimal.
In some industries, there are companies with a conditionally optimal Debt to Equity that is higher than ten or even twenty. For example, the financial and banking sector. At the same time, these statistics do not show that the company is mired in debt and is on the verge of survival.
What are the pros and cons of Debt to Equity
Advantages:
Allows you to compare companies by the ratio of equity to debt.
Shows how rationally the company uses debt financing.
Demonstrates the solvency of the company.
Helps to assess the prospects for the development of the company.
Flaws:
Does not allow comparison of companies from different sectors.
Shows significantly different values when comparing companies that operate in different countries but in the same sector.
For the calculation, it requires up-to-date data on liabilities and assets, which, as a rule, are published by firms once a quarter.
Conclusion
The Debt to Equity multiplier shows the ratio of a company's equity to borrowed capital. Since it has not only pluses, but also minuses, when evaluating a company for potential investment, it should be used in combination with other multipliers.
It is important to remember that borrowing more than the equity of the firm is not always a negative sign. Debt obligations, especially long-term ones, with proper use, allow the company to develop and increase profits.
