Question

Samsung (Samsung.com), Apple, and Google are competitors in the global marketplace. Selected results from these companies follow.

	Samsung	Apple	Google
Key Figures (in millions, except ratio)	Current Year	Prior Year	Current Year	Prior Year	Current Year	Prior Year
Total assets	W242,179,521	W230,422,958	8 \(290,479	\)231,839	\(147,461	\)129,187
Total liabilities	63,119,716	62,334,770	171,124	120,292	27,130	25,327
Total equity	179,059,805	168,088,188	119,355	111,547	120,331 1	103,860
Debt-to-equity ratio	?	?	1.43	1.08	0.23	0.24

Required

1. Compute Samsung’s debt-to-equity ratio for the current year and the prior year.
2. Use the data provided and the ratios computed in part 1 to determine which company’s financing structure is least risky.

Short answer

1. Debt to equity ratio, Current year = 0.35 and Prior year =0.37.
2. Samsung has less debt risk in both years compared to Apple.

Step-by-step solution

Meaning of Debt-to-equity ratio

The debt-equity ratio may gauge the corresponding stake that creditors and owners or shareholders have within the capital utilized in a company. In its easiest form, the debt-equity ratio is the extent of all long-term obligations to equity capital in a company.

(a) Computing Debt-to-equity ratio

Samsung Current year Debt-to-equity ratio

$\begin{array}{c}\text{Debt-to-equity\hspace{0.17em}ratio}=\frac{\text{Total\hspace{0.17em}liabilities}}{\text{Equity}}\\ =\frac{63,119,716}{179,059,805}\\ =0.35\end{array}$

Samsung Prior year Debt-to-equity ratio

$\begin{array}{c}\text{Debt-to-equity\hspace{0.17em}ratio}=\frac{\text{Total\hspace{0.17em}liabilities}}{\text{Equity}}\\ =\frac{62,334,770}{168,088,188}\\ =0.37\end{array}$

(b) Determining which company’s financing structure is least risky

The debt-to-equity ratio for Samsung marginally dropped from the previous year to the present year. Samsung has a lower debt-to-equity ratio than Apple both currently and in previous years. This shows that Samsung has a lower risk of debt in both years than Apple (at least on this one dimension). Samsung has a larger debt-to-equity ratio than Google for both years, indicating a higher risk of debt (at least on this dimension).