The Debt/Equity ratio is another important indicator of Dunkin Donuts’ financial standing. In equation form, the Debt/Equity = Total Liabilities/(Total Assets – Total Liabilities). Debt/equity ratio is able to indicate all of its debt obligations of the next year with its current resources. In general, a high debt-to-equity ratio indicates that a company may not be able to generate enough cash to satisfy its debt obligations. However, a low debt-to-equity ratio may also indicate that a company is not taking advantage of the increased profits that financial leverage may bring.
This will be able to specify Dunkin Donuts’ leverage and whether or not they are able to survive short periods of declines in revenues. It can also be a good indicator of whether or not the company is being overwhelmed by debt. This is also important if Dunkin Donuts is looking to make a significant investment or expenditure to respond to any changing market conditions.
When examining the health of a company, it is critical to pay attention to the debt/equity ratio. If the ratio is increasing, the company is being financed by creditors rather than from its own financial sources which may be a dangerous trend. Lenders and investors usually prefer low debt-to-equity ratios because their interests are better protected in the event of a business decline. Thus, companies with high debt-to-equity ratios may not be able to attract additional lending capital.
The optimal debt to equity ratio is considered to be around 1. Dunkin Donuts is a food and beverage industry, which has different industry standards. For the past 5 years, Dunkin Donuts’ debt to equity ratio has an average of -2.56.
Their competitors, Starbucks has an average debt to equity ratio of .26 (closer to 0) and McDonalds, has a debt to equity ratio of 1.18. For Dunkin Donuts to have a negative debt to equity ratio would indicate negative equity. From this information, it looks like Starbucks has the healthiest debt to equity ratio followed be McDonalds and then Dunkin Donuts. The debt to equity ratio can be influenced by a loss in total assets while keep the liabilities the same or have the same assets but increasing their liabilities.