Question

Could anyone explain how changing accounts payable and increasing revenues changes the debt/equity ratio?

Answer 1

ANSWER:

Given,

explain how changing accounts payable and increasing revenues changes the debt/equity ratio?

The debt-to-equity (D/E) ratio is calculated by dividing a company’s total liabilities by its shareholder equity. These numbers are available on the balance sheet of a company’s financial statements.

The ratio is used to evaluate a company's financial leverage. The D/E ratio is an important metric used in corporate finance. It is a measure of the degree to which a company is financing its operations through debt versus wholly owned funds. More specifically, it reflects the ability of shareholder equity to cover all outstanding debts in the event of a business downturn.

The debt-to-equity ratio is a particular type of gearing ratio.

the formula for the D/E Ratio is,

debt/equity=(total liabilities) / (total shareholders equity)

The information needed for the D/E ratio is on a company's balance sheet. The balance sheet requires total shareholder equity to equal assets minus liabilities, which is a rearranged version of the balance sheet equation (assets = liabilities + shareholder equity).

These balance sheet categories may contain individual accounts that would not normally be considered “debt” or “equity” in the traditional sense of a loan or the book value of an asset. Because the ratio can be distorted by retained earnings/losses, intangible assets, and pension plan adjustments, further research is usually needed to understand a company’s true leverage.

Because of the ambiguity of some of the accounts in the primary balance sheet categories, analysts and investors will often modify the D/E ratio to be more useful and easier to compare between different stocks. Analysis of the D/E ratio can also be improved by including short-term leverage ratios, profit performance, and growth expectations.

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