Tracking Your Debt
The debt ratio that is most commonly developed using balance sheet numbers is called the Debt to Equity Ratio. This ratio compares what the business owes to what it owns. A financial institution considering a loan can quickly find out how well a company is managing its financial commitments with this tool. The formula for the Debt to Equity Ratio is:
Total Debt ÷ Equity = Debt to Equity Ratio
The Debt to Equity Ratio for Lisa’s Candle Shop is:
$8,732.71 ÷ $15,625 = 0.56
This is an excellent ratio and Lisa is in good shape to qualify for additional loans if she feels they will help her grow the business. Miscellaneous retail outlets work with a much higher ratio, which means they carry greater debt. The average Debt to ...