This ratio is the basic ratio of capital structure, calculated during the vertical analysis of the liabilities part of the balance sheet. It is used to assess the correctness of the equity level with respect to foreign capital (i.e. debt). The greater its value, the better (safer, with lower financial risk) the financial standing of the company, and consequently the better the solvency andcreditworthiness of the company (higher debt capacity indicates the ability of incurring new liabilities in the future). If the ratio's value is low it is recommended to perform debt structure analysis to check the reasons for high debt level: high long-term debt affects the solvency, while high short-term debt affects financialliquidity. Maintaining the ratio's value at a very high level is safe, but it lowers the operatingprofitability(the company does not use the positive financial leverage effects – the leverage allows to increase the equity profitability by increasing the debt levels).
