Debt-to-equity vs current ratio
The debt-to-equity ratio is total debt divided by total equity, showing how much of the business runs on borrowed money. The current ratio is current assets divided by current liabilities, showing whether near-term bills are covered. They answer two different questions about financial health, and debt itself is not the danger. Debt without cash behind it is.
Debt-to-equity ratio and Current ratio side by side
| Debt-to-equity ratio | Current ratio | |
|---|---|---|
| Formula | Total debt ÷ total equity | Current assets ÷ current liabilities |
| What it shows | How much of the business runs on borrowed money, against owners' own money | Whether what is owed soon is covered by what can become cash soon |
| Time horizon | The whole structure of the business | Roughly the next year |
| A higher figure means | More borrowed money for each rupee the owners put in | More short-term assets for each rupee of near-term bills |
| Question it answers | How much does the business rely on lenders? | Can it pay its bills if next year turns bad? |
Why sales alone are not enough
Rising sales and constant news coverage tell you a company is active. They tell you nothing about whether it can pay its bills if next year turns bad. These two ratios answer that question from two angles.
Debt-to-equity
Equity is the money owners have put into the business, as opposed to borrowed money. A debt-to-equity ratio of 2.0 means that for every rupee its owners put in, the company owes 2 rupees to lenders.
Current ratio
Current assets are what a company can turn into cash within roughly a year, and current liabilities are what it owes and must pay within roughly a year. A current ratio of 0.8 means that for every rupee of bills due soon, the company holds only 80 paise.
Read them together
Debt itself is not the danger. Debt without cash behind it is. Two companies can show the same rising sales, and only the one with moderate debt and well-covered near-term bills is comfortable. What counts as high or low differs by sector. Maetis does not give investment advice.
Two companies (hypothetical numbers)
Company A has a debt-to-equity ratio of 2.0 and a current ratio of 0.8: for every rupee its owners put in it owes 2 rupees, and for every rupee of bills due soon it holds 80 paise. Company B has a debt-to-equity ratio of 0.4 and a current ratio of 1.8: it owes 40 paise per owner rupee and holds ₹1.80 for each rupee of near-term bills. Both could show the same rising sales. Only B is comfortably covered.
A third company owes ₹40 lakh against ₹80 lakh its owners have put in, a ratio of 0.5, and holds ₹30 lakh of near-term assets against ₹20 lakh of near-term bills, a current ratio of 1.5.
Common questions
- What does the debt-to-equity ratio show?
- How much of a business runs on borrowed money compared with the owners' own money.
- What does the current ratio show?
- Whether a company's near-term assets cover its near-term bills.
- Is high debt always bad?
- No. Debt itself is not the danger. Debt without cash behind it is.
- What is a good current ratio?
- It depends on the sector. Compare a company with others in its own line of business.
Related terms
This page compares ideas and does not recommend either one. Maetis does not give investment, tax or legal advice.