0
$\begingroup$

I have been reading a bit about this adjusted debt to equity ratio and also regarding treasury shares. I'm going to use the following example in my question.

Common Stock = $ 20 000

Treasury Stock - Common = $-10000

=> Total Equity = 10 000

Total Debt = $ 6000

Now, looking at that and if we use the normal D/E ratio we get a ratio of 0.6. However, someone might say that "hey that is unfair, they have been buying back lots of shares". So they propose to adjust for the treasury stock, resulting in a ADJ D/E ratio of 0.3, a lot better. However, now we assume that those common stock are retired, thus resulting in total equity staying at 10 000, Treasury Stock - Common going to 0 and some other stuff in equity being reduced to counter for this.

If now that same person comes back and uses his ADJ D/E ratio, he will receive a value of 0.6 just like the normal D/E ratio. So my question is, why would anyone use the adjusted D/E ratio when it is obviously flawed? I mean, maybe the company always retires the share instantly so they never pop up as Treasury on the balance sheet.

$\endgroup$

Your Answer

By clicking “Post Your Answer”, you agree to our terms of service, privacy policy and cookie policy

Browse other questions tagged or ask your own question.