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Construction Work-In-Progress

A high debt/equity ratio means a company finances growth aggressively through debt, which can lead to volatile earnings from additional interest expenses. While debt may increase earnings if it generates a higher return than the interest cost, the debt costs may outweigh the returns and cause bankruptcy. The acceptable debt/equity ratio depends on the industry, with capital-intensive industries usually having higher ratios than other industries.

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39 views1 page

Construction Work-In-Progress

A high debt/equity ratio means a company finances growth aggressively through debt, which can lead to volatile earnings from additional interest expenses. While debt may increase earnings if it generates a higher return than the interest cost, the debt costs may outweigh the returns and cause bankruptcy. The acceptable debt/equity ratio depends on the industry, with capital-intensive industries usually having higher ratios than other industries.

Uploaded by

coeh
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o A high debt/equity ratio generally means that a company has been

aggressive in financing its growth with debt. This can result in volatile
earnings as a result of the additional interest expense.
If a lot of debt is used to finance increased operations (high debt to
equity), the company could potentially generate more earnings than it
would have without this outside financing. If this were to increase
earnings by a greater amount than the debt cost (interest), then the
shareholders benefit as more earnings are being spread among the
same amount of shareholders. However, the cost of this debt financing
may outweigh the return that the company generates on the debt
through investment and business activities and become too much for
the company to handle. This can lead to bankruptcy, which would leave
shareholders with nothing.
The debt/equity ratio also depends on the industry in which the
company operates. For example, capital-intensive industries such as
auto manufacturing tend to have a debt/equity ratio above 2, while
personal computer companies have a debt/equity of under 0.5.

o A plant asset is an asset with a useful life of more than one year that is used in producing
revenues in a business's operations. Examples of plant assets include land, land
improvements, buildings, machinery and equipment, office equipment, furniture, fixtures,
vehicles, leasehold improvements, and construction work-in-progress. Plant assets are
also referred to as fixed assets and/or property, plant and equipment.

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