Countrywide's Debt to Equity Ratio Revisited.

One of my readers voiced some confusion over the way Debt to Equity ratios are calculated. On the surface, it would seem reasonable to conclude that if you divide total debt by total cash, then that should give rise to the Debt to Equity ratio.

In this reader's post, "if cash avialble is $52.4 Bil and debt is $113.6 how is ratio around 7-shouldnt it be 1:2.otherwise you make a very intresting case of cover-up!!!", it would be incorrect to assume that debt to equity ratio is derived from the simplistic assumption. But it is more than that. The correct way to view shareholder equity, the very definition of shareholder's equity is defined to be the following by IFRS (International Accounting Standards Board: "the owner's residual interest in the assets of the enterprise after deducting all its liabilities".

Stated simply, the equity in a company can be affected negatively (decrease) when shares outstaning in the market are repurchased by the business, assets decrease, liabilities increase, losses are realized, and dividends are paid.

In the case of Countrywide, it has taken on more debt to repurchase shares (taking on more liabilities (debt) and buying back stocks with that (liability) a double negative). Additionally, CFC is paying dividend worth 1.7% again eating into equity. Certainly, you would expect the company's assets to decrease and the liabilities to increase over the subprime issues and ALT-A loan issues and the general environment of housing bubble. That is why the Debt to Equity ratio is so high. Cash is just a facade and I expect the burn rate for cash in the near future to be relatively high and CFC may find itself in the dire need to raise capital like New Century, Accredited Home Lenders, and many other private companies in subprime businesses that have gone out of business.