What is DEBT TO EQUITY?
Debt to Equity is like asking, "How much money did the company borrow compared to how much money the owners put in?" It helps us see if a company is borrowing too much money for its size. If a company borrows a lot compared to what the owners invested, it might be risky!
What is DEBT TO ASSETS?
Debt to Assets is like asking, "How much of the company's total stuff (like buildings, machines, and cash) is paid for with borrowed money?" It shows us how much of the company's stuff is owned outright versus how much is still owed to the bank. The higher the number, the more debt the company has compared to its stuff.
Key Differences
- What they measure: Debt to Equity measures debt compared to what the owners own. Debt to Assets measures debt compared to all the company's stuff.
- What they tell you: Debt to Equity tells you if a company is too reliant on borrowed money. Debt to Assets tells you how much of a company's total stuff is funded by debt.
- What they don't tell you: Debt to Equity doesn't tell you if the company is using its stuff wisely. Debt to Assets can be misleading if a company owns a lot of stuff that isn't making money.
When to Use Each One
Let's say you want to invest in a video game company. If you see that the company has a high Debt to Equity, it means they borrowed a lot of money compared to what the owners put in. That might make you nervous! If you see a high Debt to Assets, it means a lot of their stuff is paid for with debt. This might also make you think twice before investing.
The Bottom Line
Both Debt to Equity and Debt to Assets are useful tools for understanding how a company is using debt. Debt to Equity helps you see if a company is borrowing too much compared to the owners' investment. Debt to Assets helps you see how much of a company's total stuff is paid for with debt. Use both to get a better picture of the company's financial health!