Advantages And Disadvantages Of Assets

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Assets - Anything which is considered as capable of being owned and controlled by a company or anyone for benefit then that is known as assets. For example - if you buy a table for your office then that will be your asset. The most important assets for any company are cash or money - if a company is out of cash then they will be bankrupt. Whenever customer buys some goods and they don’t pay bills means they owe you, these are short term assets. These are regarded as intangible assets. Inventory, properties like land, buildings, equipment which are used in company are known as tangible assets. Assets are always classified according to their life span or liquidity. Current asset is anything which is consumed or sold for longer time, typically…show more content…
Plus, you share the risks and liabilities of company ownership with the new investors. Since you don't have to make debt payments, you can use the cash flow generated to further grow the company or to diversify into other areas. Maintaining a low debt-to-equity ratio also puts you in a better position to get a loan in the future when needed. Equity Disadvantages By taking on equity investment, you give up partial ownership and, in turn, some level of decision-making authority over your business. Large equity investors often insist on placing representatives on company boards or in executive positions. If your business takes off, you have to share a portion of your earnings with the equity investor. Over time, distribution of profits to other owners may exceed what you would have repaid on a loan. These are basic terms which are related to Debt to Equity ratio. How to calculate debt/equity ratio Definition The debt-to-equity ratio (debt/equity ratio, D/E) is a financial ratio indicating the relative proportion of entity's equity and debt used to finance an entity's assets. This ratio is also known as financial…show more content…
If the debt cost outweighs the returns that the company generates from the debt finance through investments and businesses then it may lead to credit downgrades or bankruptcy. In such scenarios the shareholders are left with nothing. The cost of borrowed funds differs depending upon the industry and thus there is no single value which can be considered as a high debt-to-equity ratio. For example, the financial industry has a very high debt-to-equity ratio, approximately above 2.The reason being that financial institutions, banks etc borrow money to lend money. Also Capital-intensive industries have a very high debt-to-equity ratio because of the fact that they have to purchase more properties, plants, equipments to operate etc as compared to the low-capital industries. Some of the capital-intensive industries are namely services, utilities, industrial goods sector, auto manufacturing etc. As a result, investors should compare similar companies and the industry as a whole to decide whether the debt-to-equity ratio of that certain company is high or low. As a result, investors must look at a company's historical debt-to-equity ratio figures to determine if there have been significant changes that could indicate a red flag Low debt-to-equity
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