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Ratio Analysis and QuickBooks 2012

Debt Equity Ratio in QuickBooks 2012

The debt equity ratio is one of the leverage ratios you can use in QuickBooks 2012. A debt equity ratio compares a firm’s long-term debt with a stockholder’s equity or owner’s equity. Essentially, the debt equity ratio expresses a firm’s long-term debt as a percentage of its owner’s equity.

Stockholder’s equity is synonymous with owner’s equity and, in the case of a sole proprietorship, with a sole proprietor’s capital account.

The following is the formula used to calculate a debt equity ratio:

long-term debt/stockholder’s equity
A Simple Balance Sheet
Assets
Cash $25,000
Inventory 25,000
Current assets $50,000
Fixed assets (net) 270,000
Total assets $320,000
Liabilities
Accounts payable $20,000
Loan payable 100,000
Owner’s equity
S. Nelson, capital 200,000
Total liabilities and owner’s equity $320,000

By using the example balance sheet shown, you can calculate the debt equity ratio by using this formula:

$100,000/$200,000

This formula returns the debt equity ratio of 0.5. Therefore, this firm’s long-term debt equals 0.5, or 50 percent of its owner’s equity.

You simply compare your debt equity ratio with the debt equity ratios of other, similar-sized firms in your industry. As is the case with the debt ratio, the less long-term debt you carry, the better — all other things being equal.

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