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
| 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.
