What is the Difference Between Debt Ratio and Debt to Equity Ratio?
🆚 Go to Comparative Table 🆚The key difference between the debt ratio and the debt-to-equity ratio lies in what they measure. While the debt ratio measures the amount of debt as a proportion of assets, the debt-to-equity ratio calculates how much debt a company has compared to the capital provided by shareholders.
Debt Ratio:
- Measures the amount of leverage used by a company in terms of total debt to total assets.
- Represents the proportion of a company's assets that are financed by debt.
- Provides an interpretation of a company's capacity to service its long-term debt commitments.
Debt-to-Equity Ratio:
- Indicates how much debt a company is using to finance its assets relative to the value of shareholders' equity.
- Commonly used to evaluate a company's financial leverage.
- Can be interpreted as a gearing ratio, which is a measure of the degree to which a company is financing its operations with debt rather than equity.
In summary, both ratios are used to assess a company's financial leverage and risk, but they focus on different aspects. The debt ratio considers the proportion of debt to the company's total assets, while the debt-to-equity ratio compares the amount of debt to the shareholders' equity. These ratios are often used together to provide a comprehensive view of a company's financial position and risk profile.
Comparative Table: Debt Ratio vs Debt to Equity Ratio
Here is a table comparing the Debt Ratio and Debt to Equity Ratio:
| Debt Ratio | Debt to Equity Ratio |
|---|---|
| Measures the extent of a company's leverage by comparing total debt to total assets | Measures a company's financial leverage by comparing total debt (liabilities) to total shareholders' equity |
| Calculated as Total Debt ÷ Total Assets | Calculated as Total Debt ÷ Shareholders' Equity |
| Represents the proportion of a company's assets that are financed by debt | Represents the proportion of financing that comes from creditors (debt) versus shareholders (equity) |
| Shows how much debt a company has in comparison to all of its assets | Shows how much debt a company has taken on relative to the value of its assets net of debt |
| Helps in determining a company's capacity to service its long-term debt commitments | Measures how much debt a company has relative to its equity, which can be used to evaluate a company's financial risk |
- Debt vs Equity
- Cost of Equity vs Cost of Debt
- Equity vs Debt Financing
- Equity vs Debt Securities
- Cost of Capital vs Cost of Equity
- Fixed Charge Coverage Ratio vs Debt Service Coverage Ratio
- Loan vs Debt
- Deficit vs Debt
- Liability vs Equity
- Liability vs Debt
- Cost of Equity vs Return on Equity
- Equity vs Capital
- Derivatives vs Equity
- Proportionate Consolidation vs Equity Method
- Equity vs Assets
- Quick Ratio vs Current Ratio
- Current Ratio vs Acid Test Ratio
- Gearing vs Leverage
- Equity vs Equality