Value stock guru Benjamin Graham counseled, among other things, that
the company of a good stock would possess a debt-to-equity ratio of
less than one. Debt/equity is also known as "total
liabilities"/"shareholders' equity." For around the last year or more,
at the (granted sometimes flawed) finance.yahoo site, every stock I
checked had "N/A" for the debt-to-equity ratio. Before the financial
crisis, this was not so.
Today I started checking debt-to-equity ratios again. It seems most
stocks I check now have a number for debt/equity. The ratios are
mostly on the high side (like in the hundreds).
What is the explanation for the disappearance for a period (it seemed)
of debt-to-equity ratios?
I wasn't looking at Yahoo, but my guess is some banks whose accounting
wizardry literally took the whole world as well as the banks
themselves by surprise. generated a divide by zero error that messed
up the software. Debt to equity in the hundreds sounds like they've
been working on the software but still don't have it right. Debt as a
percent of capitalization numbers I've seen recently are below 50%.
My strongest point in life is not accounting, so may I ask, where is
debt/equity also known as total liabilities to shareholder equity? My
notion is (was) that debt means long-term debt such as bonds, but
might include revolving credit facilities if those are used or likely
to be used. Total liabilities includes accounts payable, for example,
in the current liabilities, and a quick ratio of current items is used
to measure near-term liquidity.
I do not have accounting experience either but on your prompt, I just
looked up "shareholder equity." From wikipedia: "In accounting and
finance, equity is the residual claim or interest of the most junior
class of investors in assets, after all liabilities are paid."
My guess is that for some reason assets reduced in value to such an
extent that they would not cover liabilities. So equity was zero, and
companies' computers spewed back not-a-number. But I swear this
occurred for every company (of many many companies) I looked at for a
period of many months.
If the above is so, I guess I need to ask next how the value of assets
That was my guess, I just worded it differently. I didn't write the
program, but I've seen the phenomenon before, where a single error
propagates errors through all similar computations. If you set up a
spreadsheet for a budget and expect to always have a positive number
for taxes paid, then you don't check that sign with an @IF function in
the cell. Then you get a tax credit, and enter a negative number for
tax paid, and if your spreadhseet has linked cells, the error
propagates through the entire spreadsheet because one cell had an
error. Some programmers like to use the "stack." Think of a stack of
dishes: the last plate pushed onto the top is the first one pulled
off. It's easier to program than the more rigorous way of setting up a
separate data storage, but "stack overflow" is a rather common crash
error. The data pushed onto the stack isn't checked for errors (like
equity < 0) and it *could* corrupt the entire stack (data size is
greater than was allowed for), which would affect all stack storage
and retrieval, and the program can go nuts. Regardless, you get the
idea that one error can affect the entire database. Databases are not
as strong with numbers in their "fields" as spreadsheets are with
numbers in their "cells," and the pressures to use high level
languages to get a program as quickly as possible puts a lot of faith
in the compilers (programs that translate a high-level language into
machine language) which also like to use the stack data segment. Lotus
used to be famous for writing their code in assembly language, in
which anything and everything can be checked and double checked.
I'll look for my accounting text. I disagree with the first "quick and
ready" Wiki definition, since the equity section of a balance sheet
includes treasury stock and retained earnings, Any "Intro to
Accounting" text will cover financial statements with sufficient rigor
to pierce an honest financial statement, and my bet is there are
literally tons of used ones for sale *cheap* by students who never
want to see them again but are too carbon-conscious to do what they
really would like to do to them, and so settle for the lesser
You must be an accountant. I admire accountants' terseness and
But isn't debt to equity useful only if it excludes current
liabilities such as accounts payable which are normally offset by
current assets such as accounts receivable? In shareholders equity,
retained earnings can be drawn down first, followed by the sale of
treasury stock (but never by cancelling the CEO's stock options or
No, but I am married to one.:) I also remember a little from my MBA.
The debt/equity ratio normally includes all debt regardless of when it
is due. I am afraid you have lead a sheltered life when it comes to
financial statements. Current liabilities may be offset by current
assets in most healthy businesses but that is not always the case in
every business. I did some work for one company that I remember in
particular whose owner was so focused on sales and growth that he
ignored customer quality and, as a result, had a lot of deadbeats. If
you factored in allowance for bad debts and collection costs his
current assets were frequently less than current liabilities. To make
matters worse, to provide working capital to support the growth, he had
to factor his receivables which increased costs still more.
You shouldn't look for a sinister reason. They may just have changed
their data model, incorporating more raw data, and didn't receive the
necessary numbers from the SEC database until a later point in time. You
can find the raw data under FINANCIALS -> balance sheet and calculate
historic D/E ratios (using GE for an example):
curr. 2009 2008 2007
4.30 5.67 7.62 5.88
Equity in corporate finance is used differently from real estate. The
D/E ratio describes the proportion of outside (put up by the financial
market) to owner's (or shareholder's) capital. Yahoo displays it as
percentages, thus the numbers in the hundreds.
Per Andreas hints I agree that one can do one's own computations of
debt/equity, using the yahoo site and assuming yahoo has the raw
numbers right, as follows:
Go to site finance.yahoo.com
Type in the stock symbol
On the left click on "Balance Sheet"
Divide total liabilities by total stockholder equity
The explanation for why, under finance.yahoo, the "key statistics"
listed debt/equity numbers were not shown for many months still
remains to be determined. I will take it as a yahoo software glitch
Understanding a business is indeed interesting; getting a handle on
it, then following it. Supporting your point, a good thing to remember
is that financial statements are for use (and studied interpretation),
E.g. Multi-year leases might be long-term receivables; I haven't
looked into the accounting guidelines on that, but both links Elle
provided uphold the standard that debt/ equity is usually long-term
One relies on the accounting profession. Various organizations such as
AICPA, FINRA, and perhaps especially FASB (which has a fascinating
formal forum on-line) are sources for more in-depth understanding of
accounting guidelines and how those become "standards" to the
Financial Accounting Standards Board. I was surprised by the seniority
of the SEC.
Misuse and abuse of reporting has infected the investment world
wholesale in the entire process. In keeping with what you said, as
more comes to light on Wachovia it's apparent that the end of what was
at one time a reputable bank before it fell under that entire
pitifully inept mismanagement, came through others' knowledge and
refusal to extend credit.
Are your sure about this.
In his book "Intelligent Investor", he has the following advice in his
chapter on stock selection for the Defensive Investor
For industrial companies current assets should be at least twice
current liabilities-a so-called two-to-one current ratio. Also, longterm
debt should not exceed the net current assets (or "working
capital"). For public utilities the debt should not exceed twice the
stock equity (at book value).
He is advising checking the debt/equity ratio only for public utilities,
not for other companies. Even for public equities, he recommends a maximum
. Here it states the following guideline, among others, for valuestock picking, referencing Graham and Dodd as first laying theframework:
There should be no more debt than equity (i.e. D/E ratio < 1).
On further research, I see reference made to Graham's 1976 interview
published in "Medical Economics." The article is titled, "The Simplest
Way to Select Bargain Stocks." Site
in this interview Graham stated debt/equity should be less than1.