Investigating the Treatment of Deferred Tax in the Debt-to-Equity Ratio

One of the most useful tools to determine financial performance is the financial statements published by a company. The objective of this study is to gain a better understanding of the treatment of deferred tax in the debt-to-equity ratio and to determine how this differs between theory and practice. The study employs a qualitative method approach to collect empirical data through interviews. Data are collected from detailed interviews with academics and professionals in practice. Even though there is a multitude of ways in which deferred tax can be treated in the calculation of the debt-to-equity ratio, participants from academia and practice overwhelmingly respond that they would rather include deferred tax as part of the debt. In so doing the item is not merely excluded, and this ensures that no unnecessary loss of information occurs. The study only focused on stockbrokers and portfolio managers who are professionals in practice. Only one input was considered regarding the debt-to-equity ratio, and many other inputs could have an impact on the calculation of this ratio. The professionals in academia only comprised two subject fields; other fields could also be taken into consideration when looking at this aspect. The study recommends that, when calculating the debt-to-equity ratio, deferred tax should be included in the calculation to ensure that the ratio remains comparable and as simple as possible. Furthermore, it is also recommended that the debt-to-equity ratio should be calculated including and excluding deferred tax and that both these ratios should be disclosed. By computing both ratios the user has the freedom to select the ratio that best suits their needs, and the impact of the deferred tax will not be ignored.