Decision Analysis: Debt-to-Equity Ratio

Debt-to-Equity Ratio

A company financed mainly with debt is more risky because liabilities must be repaid with interest, whereas equity financing does not. A measure to assess the risk of a company's financing structure is the debt-to-equity ratio.

Debt-to-equity = Total liabilities/Total equity

Nike's 2017 debt-to-equity ratio is 0.87, meaning that debtholders contributed $0.87 for each $1 contributed by equity holders. This implies a low-risk financing structure for Nike and is similar to its competitors. In comparison, Under Armour's 2017 ratio is 0.98. Anaysis across the years shows that Nike's debt-to-equity ratio has risen to a riskier level in in recent years. In the case of Nike, the increase in debt-to-equity ratio is less concerning as it has historically earned higher returns with this financing than the interest rate it pays. Still, investors and debtholders will continue to monitor Nike's debt-to-equity ratio to be sure it does not reach risky levels.

Company	$ millions	2017	2016	2015
Nike	Total liabilities	$10,852	$9,138	$8,890
	Total equity	$12,407	$12,258	$12,707
	Debt-to-equity	0.87	0.75	0.70
Under Armour	Total liabilities	$1,988	$1,613	$1,198
	Total equity	$2,019	$2,031	$1,668
	Debt-to-equity	0.98	0.79	0.72

In this forum, please respond by Sunday, April 25th before 11:30 p.m. Below is the information that needs to be included in your post:

• Calculate the debt-to-equity ratio for both company's
• Analyze the ratio for both company's