debt-to-total-assets ratio definition · LSData (2024)

FAQs

What is the meaning of total debt to total assets ratio? ›

The total debt-to-total assets ratio is calculated by dividing a company's total debt by its total assets. This ratio shows the degree to which a company has used debt to finance its assets. The calculation considers all of the company's debt, not just loans and bonds payable, and all assets, including intangibles.

A simple rule regarding the debt-to-asset ratio is that the higher the ratio, the higher the leverage. And the higher the leverage, the higher the risk of default. We express the debt-to-asset ratio as a percentage.

Short-term debt to total assets ratio shows how much of the enterprise's total assets are financed using loans and financial debts lasting for one year or less.

Debt-to-total-assets ratio = 0.8 or 80% This means that 80% of Company B's assets are financed by debt, which indicates that the company has a higher risk of defaulting on its loans.

Your debt-to-income ratio (DTI) is all your monthly debt payments divided by your gross monthly income. This number is one way lenders measure your ability to manage the monthly payments to repay the money you plan to borrow. Different loan products and lenders will have different DTI limits.

A higher total assets to debt ratio represents more security to the lenders of long-term loans. However, lower total assets to debt ratio represent less security to the lenders of long-term loans, which indicates more dependence of the firm on long-term borrowed funds.

Key Takeaways

In general, many investors look for a company to have a debt ratio between 0.3 and 0.6. From a pure risk perspective, debt ratios of 0.4 or lower are considered better, while a debt ratio of 0.6 or higher makes it more difficult to borrow money.

If your debt ratio does not exceed 30%, the banks will find it excellent. Your ratio shows that if you manage your daily expenses well, you should be able to pay off your debts without worry or penalty. A debt ratio between 30% and 36% is also considered good.

To bring your Debt to Assets Ratio into range, assets have to increase or debt has to decrease. Increasing assets will often require a loan (more debt), new investors, or more importantly, retained earnings. New investors come with strings attached, but can often provide immediate improvement in Debt to Assets.

Interpreting the Debt Ratio

If the ratio is over 1, a company has more debt than assets. If the ratio is below 1, the company has more assets than debt. Broadly speaking, ratios of 60% (0.6) or more are considered high, while ratios of 40% (0.4) or less are considered low.

What would lead to an improvement in debt to total assets ratio? ›

To put it simply, the corporation should reduce its debt percentage to reduce the proportion. However, there are a variety of additional techniques to enhance the debt-to-asset proportion, some of which are included below: Renting: A business sells its resources and then re-lease its buildings.

A company's long-term-debt-to-total-asset ratio measures its leverage and acts as a metric for determining its solvency. The ratio is calculated by dividing total long-term debt (i.e. debt with more than a year to maturity) by total assets.

The debt-to-total-assets ratio shows how much of a business is owned by creditors (people it has borrowed money from) compared with how much of the company's assets are owned by shareholders. It is one of three calculations used to measure debt capacity, along with the debt servicing ratio and the debt-to-equity ratio.

This ratio is often used by investors and creditors to determine if a company can pay off its debts on time and be profitable in the long run. There's no ideal figure, but a ratio of less than 0.5 is generally preferred.

Debt Ratio Formula and Calculation

So if a company has total assets of $100 million and total debt of $30 million, its debt ratio is 0.3 or 30%.

Do I need to worry about my debt ratio? If your debt ratio does not exceed 30%, the banks will find it excellent. Your ratio shows that if you manage your daily expenses well, you should be able to pay off your debts without worry or penalty. A debt ratio between 30% and 36% is also considered good.

For companies with low debt to asset ratios, such as 0% to 30%, the main advantage is that they would incur less interest expense and also have greater strategic flexibility. For example, a company might determine that ceasing to offer a particular product or service would be in their best long-term interest.

The current ratio for Company ABC is 2.5, which means that it has 2.5 times its liabilities in assets and can currently meet its financial obligations Any current ratio over 2 is considered 'good' by most accounts.