Since we are talking about financial ratios used for fundamental analysis, let me include another financial ratio indicator which is the debt to equity ratio. Like our previous financial ratios discussed, we will also include the formula.
The debt/equity ratio is another indicator of a company's fiscal health. This is the equivalent of a credit report for a company and is measure of the company versus the capital being used. The debt/equity ratio is: (Total Liabilities) / (Shareholder's equity)
One would think that the less debt a company has, the better. But a low debt/equity ratio is not necessarily a good thing. It can be an indicator that a company is not making the best use of its spending power. Just as credit report companies frown upon someone who does not use at least a portion of the credit available to them, companies can actually miss out on opportunities if they are not using the credit available to them in order to help with expansion efforts.
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