The average debt-to-equity ratio for retail and commercial US banks, as of January 2015, is approximately 2. 2. For investment banks, the average debt / equity is higher, approximately 3.1.
The debt / equity ratio is a leverage ratio that indicates the amount of debt and equity used to finance the assets of a company. It is calculated as total liabilities divided by total equity. The debt / equity ratio is considered an important financial metric because it is an indication of a possible financial risk.
A relatively high debt / equity ratio usually indicates an aggressive growth strategy of a company. For investors, this means potential higher profits with a correspondingly increased risk of loss. If the extra debt the company takes on can increase the net profit by an amount that exceeds the interest cost of the extra debt, the company should provide a higher return on equity to investors. However, if the interest costs of the additional debt do not lead to a significant increase in revenue, the additional debt Tinker Tax reduces the profitability of the company. In the worst case scenario, this could overburden the company financially, resulting in insolvency and ultimately bankruptcy.
A debt / equity ratio of 1.5 or lower is generally considered to be good, and ratios higher than 2 are considered less favorable, but the average debt / equity ratios vary between branches. Therefore, when examining the debts / equity of a company, investors must compare it with that of comparable companies in the same sector. A relatively high debt / equity ratio is common in the banking system and in the financial sector as a whole. Banks have higher amounts of debt because the money they borrow is the money they borrow. In other words, the most important product that banks sell is debt. It is therefore logical that they have more of that product to hand than is usual in other industries.