When try to calculate debt-to-asset ratio, I came across different formulas. There are:

  1. Total debt divided by total asset, where Total debt = short-term debt + long-term debt from Balance Sheet.

  2. Total liabilities divided by total asset

In financial world, which is the more widely used formula here? As (2) will give a higher ratio than (1).


One is not "better" than the other. They measure different things. Debt is a measure of how a company is financed, and how solvent they are (how many assets they have that could be used to pay off debt). Total liabilities include non-"debt" liabilities like receivables and long-term lease obligations, which are more on an operational measure (how much a company's sales are on credit).

So it's more important to choose the one that matches what you're trying to measure, but more important that that is to be consistent when comparing companies to each other.


(If you're asking this in regards to your own situation... people have different needs from "the financial world". My answer is solely about personal finance.)

Compute both a debt ratio and a liabilities ratio. Even break down the debt ration into short-term debt divided by short-term assets and long-term debt divided by long-term assets.

You can also compute your Quick Ratio, which is short term assets divided by liabilities.

Note that in this context I don't put monthly bills in the "liabilities" category. Only "large", future (3-12 months away) expenditures go in that bucket. Examples are: summer vacation, end of year property tax, semi-annual and annual insurance premiums, etc.

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