The Debt For Equity Ratio Measures A Company 's Financial Leverage By Dividing Its Liabilities

716 Words Dec 13th, 2015 3 Pages
The debt to equity ratio measures a company’s financial leverage by dividing its liabilities by its equity. A high ratio indicates a company is using too much financing to grow. Although financing is a great tool for increasing production and capital, it is significant that CanGo shows financial growth so that higher earnings can be distributed to shareholders rather than cash flow going to repaying debts. Barnes & Noble’s most recent debt to equity ratio is 0.33 (Businessweek.com, 2014), CanGo’s is 0.67 which is notably higher than the industry average. Still, other ratios tell us that CanGo is not financing its growth enough, and is being too cautious with its capital.

The current ratio is a liquidity ratio that shows a company’s ability to repay its immediate debts using its short-term assets, such as cash. It also reflects the company’s ability to generate cash from sales and inventory. The desired current ratio is above one (1.0), under (1.0) does not mean a company is unable to repay its short-term debts. It indicates that a company may not be able to meet its obligations when they become due (Investopedia, Current Ratio, 2014). CanGo’s current ratio is 5.39, which is an excellent number. This makes CanGo a more appealing lender when financing is needed, and it may indicate a very small chance of bankruptcy. Although CanGo’s debt to equity ratio can be improved upon, it clearly hasn’t incurred any short-term debts that it cannot repay.

The quick ratio,…

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