Investors can sometimes mention liability or debt when they mean the same thing.
However more precise –
- debt refers to borrowed money
- liabilities to an obligation of any kind, such as loans, tax or employee super
But when using and comparing company financial ratios – there is a difference between Debt & Liability and one needs to know which is used in the ratio to understand it’s meaning.
For example in the debt-to-equity ratio, debt means the total amount of liabilities both short term (less than 12 months), and long term (over 12 months). This means, debt includes short-term accounts such as overdrafts and credit cards and normally also includes accrued wages and utilities, income taxes due and other liabilities, plus long-term accounts like long-term loans and bonds payable. In other words, sometimes debt means all obligations… all amounts owed… all liabilities.
However, other times, the word debt is used more narrowly to mean only the formal, written financing contracts such as short-term loans payable, long-term loans payable and bonds payable, example – hire-purchase, equipment finance, etc.
As always, keep these in mind to know WHAT is being used – be clear and have it defined!
Want to learn the core issues of share investing?
See our slides SMSF & Shares Overview to get a quick session where you can learn to easily understand Company Financial Statements, how to find healthy companies, what Tools and Ratios to use, work on examples, and also includes how to get better investment outcomes.