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Auditing/debt to equity ratio

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Expert: Consuelo Herrera, International Accountant and Fraud Examiner - 4/4/2009


Question
I have found 2 different debt to equity ration formula:
  1. =total liabilites/shareholder's equity
 2. =total debt/ total shareholder's equity

Could you please explain what is difference between them?

Thanks for your help

Answer
Total liabilities divided by total assets. The debt/asset ratio shows the proportion of a company's assets which are financed through debt. If the ratio is less than one, most of the company's assets are financed through equity. If the ratio is greater than one, most of the company's assets are financed through debt. Companies with high debt/asset ratios are said to be "highly leveraged," and could be in danger if creditors start to demand repayment of debt.
This content can be found on the following page:

http://www.investorwords.com/5497/debt_asset_ratio.html

It is used for measuring solvency and researching the capital structure of a company. This ratio is carefully scrutinized by investors and lenders because it shows the ability to repay money borrowed to an organization.It should include capital and operating leases payments for it to be reliable.

When the formula includes the total debt it considers the long term debt to equity capital structure.

I do not see any difference between these two formulas. It is the same since in the formula #2 you eliminate the total from both numerator and denominator to come up with debt/shareholder's equity same as liabilities/shareholder's equity.

Hope it helps.

I wish you success in your studies.

Sincerely,


Consuelo Herrera, CAMS, CFE

Auditing

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Consuelo Herrera, International Accountant and Fraud Examiner

Expertise

I can answer questions concerning internal and operational auditing, fraud prevention procedures, internal control, the Sarbanes-Oxley Act, COSO control concepts, and management oriented auditing. I would love to provide business-owners with suggestions on how to prevent and detect fraud so that they are proactive in protecting their wealth since the very beginning of their entrepreneurial affairs. I can answer questions to both English and Spanish population. I am very committed to keep my standards up today so I know many resources where I can direct those seeking advice.

Experience

I have rendered services for private companies, profit and non for profit, in two countries. As independent consultant I have provided advice to managers in implementing procedures that streamline their operations and enhance their activities. As a staff accountant in a US CPA firm, I performed regular auditing procedures for different engagements.

Organizations
AICPA (American Association of Certified Public Accountants), ACFE (Association of Certified Fraud Examiners), ACFEI (American College of Forensic Examiners.

Education/Credentials
Bachelors of Sciences in Business Administration – Accounting University of South Florida USF – Tampa Florida Catholic University – Colombia Title earned: Specialist in Tax and Customs Central Foundation University – Colombia Title earned: Certified Public Accountant. On August, 2006 I passed all four sections of the Certified Fraud Exam which tests for proficiency in the following areas: Criminology and Ethics, Financial Transactions, Legal Elements of Fraud, and Fraud Investigation.

Awards and Honors
As employee of Forensic Technology Inc. a Canadian company with locations and sites worldwide, I was the winner of the 2005 President's award in the category of Cost Savings through Efficiency or Innovation granted in January 2006 in Montreal, Canada.

Past/Present Clients
I have provided advice to all kind of companies: manufacturing, service, consulting, non for profit organizations, etc.

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