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

Generally, the higher the debt to total assets ratio, the greater the financial leverage and the greater the risk. The company’s top management can use the debt ratio formula to make the top-level decision of the company related to its capital structure and future funding. Whether they want to raise funds from external sources like loans or debts or through equity. If the company has enough capital to repay its obligations, it can raise funds from external sources. A company’s debt-to-asset ratio is one of the groups of debt or leverage ratios that is included in financial ratio analysis.

Creditors prefer low debt-to-asset ratios because the lower the ratio, the more equity financing there is which serves as a cushion against creditors’ losses if the firm goes bankrupt. Creditors get concerned if the company carries a large percentage of debt. This tells you that 40.7% of your firm is financed by debt financing and 59.3% of your firm’s assets are financed by your investors or by equity financing. If, for instance, your company has a debt-to-asset ratio of 0.55, it means some form of debt has supplied 55% of every dollar of your company’s assets. If the debt has financed 55% of your firm’s operations, then equity has financed the remaining 45%.

What is a good debt to income ratio?

Total Assets to Debt Ratio is the ratio, through which the total assets of a company are expressed in relation to its long-term debts. It is a variation of the debt-equity ratio and gives the same indication as the debt-equity ratio. The increase in sales can be used to diminish the debt proportion debt to asset ratio and improve the debt to total assets ratio. Likewise, the sum of all assets listed on the balance sheet of a company. The total assets include current assets, non-current assets and other assets as well. There is more than one variety of this formula depending on who is analyzing it.

Companies with a low debt ratio are considered more financially stable and less risky for investors and lenders. The debt to total assets ratio describes how much of a company’s assets are financed through debt. Total-debt-to-total-assets is a leverage ratio that defines how much debt a company owns compared to its assets. Using this metric, analysts can compare one company’s leverage with that of other companies in the same industry. The higher the ratio, the higher the degree of leverage (DoL) and, consequently, the higher the risk of investing in that company. The debt to asset ratio is also known as the total debt to total asset ratio that shows the proportion of assets being held by a company that is funded by debt.

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Total liabilities are the total debt and financial obligations payable by the company to organizations or individuals at any defined period. Essentially, the debt-to-asset ratio is a measure of a company’s financial risk. Investors and lenders look to the debt-to-asset ratio to assess a company’s risk of becoming insolvent. Companies with a high ratio are more leveraged, which increases the risk of default. You can also take a look at our other financial calculators, for example the debt to asset ratio (especially useful for companies) or the debt to income ratio (interesting for personal finance purposes). Companies with high debt-to-asset ratios may be at risk, especially if interest rates are increasing.

What is the debt-to-asset ratio formula?

A debt to asset ratio closer to 1 indicates a highly leveraged company. It shows that the company acquired the majority of its assets through debt. This means that 80% of the company’s assets have been financed through debt. A ratio higher than 0.5 or 50% can determine a higher risk of the business. Of course, this ratio needs to be assessed against the ratio from comparable companies. The Debt to Asset Ratio, or “debt ratio”, is a solvency ratio used to determine the proportion of a company’s assets funded by debt rather than equity.

Fundamentally, companies have the option of generating investor interest in an attempt to obtain capital and generate profit in order to acquire assets or take on debt. Let’s see some simple to advanced debt to asset ratio example to understand them better. The downside to having a high total-debt-to-total-asset ratio is it may become too expensive to incur additional debt. The company will likely already be paying principal and interest payments, eating into the company’s profits instead of being re-invested into the company.

Total-Debt-to-Total-Assets Formula

As with other financial ratios, the debt ratio should be considered within context. It can be evaluated over time to determine whether a company’s overall risk is improving or worsening and it should be assessed in the context of the specific industry. Looking at these two companies in the example, it’s apparent that Company A’s debt-to-asset ratio is much higher than Company B’s debt-to-asset ratio. Being that Company A’s debt-to-asset ratio is greater than 1, it suggests that Company A is funding a large part of its assets strictly by debt. Having a high asset-to-debt ratio means that your company could be at risk of defaulting on its loans and debts.