Companies use the debt to equity ratio to measure the amount of financing from debt the operations use compared to their funds fully owned.
Companies use the debt to equity ratio to measure the amount of financing from debt the operations use compared to their funds fully owned. It is calculated by dividing total liabilities by the equity of the shareholders (Mansa, 2020). This is important to understand because it shows the companies ability to cover its debts using shareholders\’ equity if the business begins to downturn (Manza, 2020). John Deere has a debt to equity of .833 for February of 2020 and a debt to equity of .837 for January of 2019. Their debt to equity ratio has gone down slightly from the previous year even though it is not much. It is important because the lower the debt to equity ratio is, it makes the lower risk of investment for new shareholders. This can also help increase share prices because of the low debt to equity risk. It is also important because it shows that the John Deere company can pay off its debts even in the event of poor economic conditions. The year span of consistent debt to equity ratio indicates the John Deere Company is showing stability and if it continues with its business model it should continue to be low risk. It is also important to compare John Deere’s debt to equity ratio to the industrial average. John Deere is below the market average (Ready Ratios, 2020). They are staying within the recommended ratio and this shows that they are a lower risk investment and they can better pay their debts in low economic conditions. John Deere’s debt to equity is appropriate for the company because they have a low ratio and they are lower than the industry average. The lower average for John Deere will allow them to increase their leverage, hopefully increasing their earnings if they decide to make that change. It is also a good ratio for the company because they are below a ratio of 1 which means that they are at a lower risk of not making their payments if there is an economic downturn in the company. The low ratio keeps the investors and shareholders satisfied with lower risk and can improve the share pricing if they are able to have a consistently low ratio. The financial managers should track the debt to equity ratio over time to compare themselves to the industry and see how they are performing over the years. If their debt to equity is consistent over the years and their ratio is low risk, they can continue to operate their business model and be successful. It is also important to track their ratio because the manager will know how much leverage they are using and if they can increase their leverage to gain higher earnings. If they continue to increase their leverage over time, they may want to reorganize to lower their debt to equity ratio to decrease risk. Tracking this ratio from year to year also helps the manager know if their operations are running efficiently and if the changes, they may have implemented to their ratio have worked. If the changes are positive the financial manager can expect better stability and if there are negative changes, they can make the necessary adjustments to improve their ratio in the future.
References
John Deere. (n.d.). Investor relations (Links to an external site.) (Links to an external site.). Retrieved from https://investor.deere.com
Mansa, J. (2020, November 17). Debt to equity ratio (D/E). Investopedia. https://www.investopedia.com/terms/d/debtequityratio.asp (Links to an external site.)
Ready Ratios. (2020, January). Deere & company (DE) financial analysis and rating. https://www.readyratios.com/sec/DE_deere-co (Links to an external site.)
Answer preview to companies use the debt to equity ratio to measure the amount of financing from debt the operations use compared to their funds fully owned.
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