Debt-To-Total-Assets Ratio Definition, Calculation, Example

The higher the debt ratio, the more leveraged a company is, implying greater financial risk. At the same time, leverage is an important tool that companies use to grow, and many businesses find sustainable uses for debt. Some sources consider the debt ratio to be total liabilities divided by total assets. This reflects a certain ambiguity between the terms debt and liabilities that depends on the circumstance. The debt-to-equity ratio, for example, is closely related to and more common than the debt ratio, instead, using total liabilities as the numerator. A debt ratio greater than 1.0 (100%) tells you that a company has more debt than assets.

What Does the Total Debt-to-Total Assets Ratio Tell You?

A company’s debt-to-asset ratio is one of the groups of debt or leverage ratios that is included in financial ratio analysis. The debt-to-asset ratio shows the percentage of total assets that were paid for with borrowed money, represented by debt on the business firm’s balance sheet. It also gives financial managers critical insight into a firm’s financial health or distress.

Ability to Meet Debts

To illustrate, suppose the company had assets of $2 million and liabilities of $1.2 million. Since equity is equal to assets minus liabilities, https://www.quick-bookkeeping.net/ the company’s equity would be $800,000. Its debt-to-equity ratio would therefore be $1.2 million divided by $800,000, or 1.5.

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We can use the debt-to-asset ratio to measure the amount or percentage of debts to assets. Any company’s assets are part of the growth driver, but they also help guarantee and service any debt a company carries. Repaying direct vs indirect costs their debt service payments is non-negotiable and necessary under all circumstances. Other debts, such as accounts payable and long-term leases, have more flexibility and can negotiate terms in the case of trouble.

The debt-to-asset ratio gives you insight into how much of your company’s assets are currently financed with debt, rather than with owner or shareholder equity. Acceptable levels of the total debt service ratio range from the mid-30s to the low-40s in percentage terms. It’s great to compare debt ratios across companies; however, capital intensity and debt needs vary widely across sectors. The financial health of a firm may not be accurately represented by comparing debt ratios across industries. Bear in mind how certain industries may necessitate higher debt ratios due to the initial investment needed. A high debt-to-assets ratio could mean that your company will have trouble borrowing more money, or that it may borrow money only at a higher interest rate than if the ratio were lower.

The debt-to-asset ratio can be useful for larger businesses that are looking for potential investors or are considering applying for a loan. It gives a fast overview of how much debt a firm has in comparison to all of its assets. Because public companies must report these figures as part of their periodic external reporting, the information is often readily available. Over 1.8 million professionals use CFI to learn accounting, financial analysis, modeling and more. Start with a free account to explore 20+ always-free courses and hundreds of finance templates and cheat sheets. Industries with lower debt-to-asset ratios, such as services and wholesalers, tend not to have a lot of assets to leverage.

1. As is often the case, comparisons of the debt ratio among different companies are meaningful only if the companies are similar, e.g. of the same industry, with a similar revenue model, etc.
2. A ratio that equates to 1 or a 100% debt-to-total-assets ratio means that the company’s liabilities are equally the same as with its assets.
3. Business managers and financial managers have to use good judgment and look beyond the numbers in order to get an accurate debt-to-asset ratio analysis.
4. A company that has a high debt-to-equity ratio is said to be highly leveraged.
5. This ratio is sometimes expressed as a percentage (so multiplied by 100).

Creditors use the ratio to see how much debt the company already has and whether the company can repay its existing debts. This will determine whether additional loans will be extended to the firm. Total debt-to-total assets is a measure of the company’s assets that are financed by debt rather than equity. If the calculation yields a result greater than 1, this means https://www.quick-bookkeeping.net/what-is-meant-by-nonoperating-revenues-and-gains/ the company is technically insolvent as it has more liabilities than all of its assets combined. A result of 0.5 (or 50%) means that 50% of the company’s assets are financed using debt (with the other half being financed through equity). The debt-to-total-assets ratio is important for companies and creditors because it shows how financially stable a company is.

Because companies receive better reactions to lower debt ratios, they can borrow more money. The higher the ratio, the higher the interest payments and less liquidity. Generally, most investors look for a debt ratio of 0.3 to 0.6, the ratio how to calculate profit margin of total liabilities to total assets, which is the reverse of the current ratio, total assets divided by total liabilities. To determine whether the debt-to-asset ratio is good or bad, you also have to look at a company’s level of growth.