metrics explained

Debt to Equity Ratio vs Debt to Assets Ratio: What's the Difference?

When it comes to financial ratios, two of the most commonly used and confused metrics are the debt to equity ratio and the debt to assets ratio. Although both ratios measure a company's leverage, they actually provide different insights into a company's financial health. In this article, we'll take a closer look at the debt to equity ratio and the debt to assets ratio and explain the key differences between them.

What is the Debt to Equity Ratio?

The debt to equity ratio (D/E) is a financial ratio that measures a company's leverage by comparing its total liabilities to its shareholder equity. The debt to equity ratio is calculated by dividing a company's total liabilities by its shareholder equity. This ratio is also sometimes referred to as the "liabilities to equity ratio".

What is Shareholder Equity?

Shareholder equity is the portion of a company's assets that are owned by its shareholders. Shareholder equity can be thought of as a company's "net assets". It is calculated by subtracting a company's total liabilities from its total assets. Shareholder equity is also sometimes referred to as "shareholders' equity" or "equity".

What are Total Liabilities?

Total liabilities is a balance sheet item that represents the sum of all of a company's liabilities. A liability is an obligation of the company that arises during the course of business. Liabilities are typically categorized as either current or long-term. Current liabilities are obligations that are due within one year, while long-term liabilities are due after one year. Some common examples of liabilities include accounts payable, accrued expenses, and long-term debt.

What is the Debt to Assets Ratio?

The debt to assets ratio (D/A) is a financial ratio that measures a company's leverage by comparing its total liabilities to its total assets. The debt to assets ratio is calculated by dividing a company's total liabilities by its total assets. This ratio is also sometimes referred to as the "liabilities to assets ratio".

What are Total Assets?

Total assets is a balance sheet item that represents the sum of all of a company's assets. An asset is anything that is owned by the company and has value. Assets are typically categorized as either current or long-term. Current assets are assets that are expected to be converted to cash within one year, while long-term assets are assets that are not expected to be converted to cash within one year. Some common examples of assets include cash, accounts receivable, and inventory.

Key Differences Between the Debt to Equity Ratio and the Debt to Assets Ratio

Now that we've defined and explained both the debt to equity ratio and the debt to assets ratio, let's take a look at the key differences between these two financial ratios:

  • The debt to equity ratio only includes liabilities that are due to shareholders, while the debt to assets ratio includes all liabilities. The debt to equity ratio only includes liabilities that are due to shareholders, such as loans from shareholders or bonds issued to shareholders. The debt to assets ratio, on the other hand, includes all liabilities, such as loans from banks, bonds issued to bondholders, and accounts payable. This is one of the key differences between the two ratios.
  • The debt to equity ratio is a measure of a company's financial leverage, while the debt to assets ratio is a measure of a company's total liabilities. The debt to equity ratio is a measure of a company's financial leverage, which is the amount of debt a company has relative to its equity. The debt to assets ratio is a measure of a company's total liabilities, which is the amount of debt a company has relative to its assets. This is another key difference between the two ratios.
  • The debt to equity ratio is used to assess a company's solvency, while the debt to assets ratio is used to assess a company's liquidity. The debt to equity ratio is used to assess a company's solvency, which is the ability of a company to meet its long-term financial obligations. The debt to assets ratio is used to assess a company's liquidity, which is the ability of a company to meet its short-term financial obligations. This is the final key difference between the two ratios.

Now that we've looked at the key differences between the debt to equity ratio and the debt to assets ratio, let's take a closer look at each ratio in turn.

Debt to Equity Ratio

As we mentioned earlier, the debt to equity ratio (D/E) is a financial ratio that measures a company's leverage by comparing its total liabilities to its shareholder equity. The debt to equity ratio is calculated by dividing a company's total liabilities by its shareholder equity. This ratio is also sometimes referred to as the "liabilities to equity ratio".

The debt to equity ratio is a measure of a company's financial leverage, which is the amount of debt a company has relative to its equity. The debt to equity ratio is used to assess a company's solvency, which is the ability of a company to meet its long-term financial obligations. A high debt to equity ratio indicates that a company is highly leveraged and may have difficulty meeting its long-term financial obligations. A low debt to equity ratio indicates that a company is not highly leveraged and should have no difficulty meeting its long-term financial obligations.

The debt to equity ratio is also sometimes used to assess a company's short-term financial health. A high debt to equity ratio may indicate that a company is having difficulty meeting its short-term financial obligations. A low debt to equity ratio may indicate that a company is not having difficulty meeting its short-term financial obligations.

It's important to note that the debt to equity ratio is not a perfect measure of a company's financial health. A company with a high debt to equity ratio may still be able to meet its financial obligations. Similarly, a company with a low debt to equity ratio may still have difficulty meeting its financial obligations. The debt to equity ratio should only be used as one tool in assessing a company's financial health.

Debt to Assets Ratio

As we mentioned earlier, the debt to assets ratio (D/A) is a financial ratio that measures a company's leverage by comparing its total liabilities to its total assets. The debt to assets ratio is calculated by dividing a company's total liabilities by its total assets. This ratio is also sometimes referred to as the "liabilities to assets ratio".

The debt to assets ratio is a measure of a company's total liabilities, which is the amount of debt a company has relative to its assets. The debt to assets ratio is used to assess a company's liquidity, which is the ability of a company to meet its short-term financial obligations. A high debt to assets ratio indicates that a company is highly leveraged and may have difficulty meeting its short-term financial obligations. A low debt to assets ratio indicates that a company is not highly leveraged and should have no difficulty meeting its short-term financial obligations.

It's important to note that the debt to assets ratio is not a perfect measure of a company's financial health. A company with a high debt to assets ratio may still be able to meet its financial obligations. Similarly, a company with a low debt to assets ratio may still have difficulty meeting its financial obligations. The debt to assets ratio should only be used as one tool in assessing a company's financial health.

Conclusion

In conclusion, the debt to equity ratio and the debt to assets ratio are two financial ratios that are often used and confused. Although both ratios measure a company's leverage, they actually provide different insights into a company's financial health. The key differences between the debt to equity ratio and the debt to assets ratio are as follows:

  • The debt to equity ratio only includes liabilities that are due to shareholders, while the debt to assets ratio includes all liabilities.
  • The debt to equity ratio is a measure of a company's financial leverage, while the debt to assets ratio is a measure of a company's total liabilities.
  • The debt to equity ratio is used to assess a company's solvency, while the debt to assets ratio is used to assess a company's liquidity.

The debt to equity ratio and the debt to assets ratio are both important financial ratios to be aware of. However, it's important to remember that they are not perfect measures of a company's financial health. They should only be used as one tool in assessing a company's financial health.

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