Definition:
Companies use financing for startup, expansions, and continuing operations. Ordinarily, a company is financed through debt, equity, or both. Debt means borrowing money from banks, family members, or other creditors. Equity means getting people to buy stock in the company.
Example:
Using the debt-to-equity ratio you can determine if a company is highly leveraged (using debt) to finance the company. This ratio also tells us which companies are risky for investors. Debt-to-equity ratio’s differ depending on the industry, be sure to compare with other businesses in the industry or industry standards.
It is calculated by taking the total liabilities and dividing it by shareholders’ equity.
Book Excerpt:
(Excerpts from Financial Intelligence, Chapter 17 – The Language of Cash Flow)
Financing refers to borrowing and paying back loans on the one hand, and transactions between a company and its shareholders on the other. So if a company receives a loan, the proceeds show up in this category. If a company gets an equity investment from a shareholder, that, too, shows up here.
