Now, I'll say a few words about the special set of ratios that deal with capital structure. So that will be Ratio Analysis two, Capital Structure. Basically, we talk about the one major ratio, which is debt to equity, that sometimes is called leverage and that is what this is. Total liabilities divided by total network, or you can also find some other things close to that in just a moment. But here I would like to again recall that we have to compare these numbers in a special index. Let me give you two outmost examples. Well if we take banks, then the bank leverage of about let's say 10 to 20, this is a normal thing because banks they have a lot of debt and equity is kind of small, because the business of a bank and we discussed that in greatest details in our first course in capital markets. This is you borrow the money from the depositors and some other providers of capital and then you take this money and then you lend this money to your borrowers, so the two industries. So you borrow that from depositors and you lend it to companies. So basically, no wonder that you have a lot of debt, because it can be shown that returns on your equity they are higher than most of the returns on your lending. So in this way you cannot finance your lending operations with equity only. On the other hand, if you take, let's say, pharmaceutical companies, then you will see that this leverage will be very low, sometimes as low as zero. Why is that? Because pharmaceutical companies they have a lot of risk in their RND or in the performance of drugs. So if, for example, they used a lot of borrowed capital, something happens to their products and they can lose a significant portion of their market value overnight and in this case if you have lots of debt then you can become insolvent. There were cases when the stock of large pharmaceutical companies would drop by as high as 25 percent overnight, if there was something let's say if they found some poison in pills or drugs and that would result in a huge blow to the company. Now, so here you can see that clearly you can talk about ratios like equity over total assets, and then total liabilities to total assets in these two they are always, the sum of that is always one. But the story here is that, that's the same idea. And now a very important idea in studying that is the profile of risk, because basically if you see that over time your debt accumulates, then not only the project in the company becomes riskier per se, but also that goes for the risks really that the provided capital are exposed. Let's see if you had that little debt that would be almost riskless and then if you keep accumulating then the new debt becomes riskier and riskier. Now on the other hand, if you see the redemption of debt, that accrues to equity, not one to one but significantly. Now let me make a pause here and I will tell you that we have very special discussion of that in our final course of M and As. There is a special part there that deals with leveraged buyouts in which we see this is the case when the company is taken private. When the stock is being repurchased with the use of significant amount of borrowed money. And we will see that there the idea of leverage is key. The initial leverage is very high and the performance of the company depends on its ability to redeem part of that debt and to bring this leverage down and that can be done as quickly as possible to the extent that the company can engage in a secondary public offering. Not to confuse you, I will not delve deeper on that right now, but I promise to you that in our fourth course we have a full-fledged discussion that with really comprehensive examples and their understanding will be quite profound. So, again the main idea in this discussion is that we can see to what extent the debt that has been accumulating in the company is, let's say, adequate for this company and for the sector, or maybe it just goes off of the ballpark. And in this case that sends us a significant signal that something might have got rotten in the state of Denmark. That is about the analysis of capital structure. And in the next episode, we will talk about efficiency and performance of the company based on the ratios that study various returns.
