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

It is a measurement of how much of a company’s assets are financed by debt; in other words, its financial leverage. The total debt-to-total-asset ratio is calculated by dividing a company’s total debts by its total assets. Should all of its debts be called immediately by lenders, the company would be unable to pay all its debt, even if the total debt-to-total assets ratio indicates it might be able to. If debt to assets equals 1, it means the company has the same amount of liabilities as it has assets. A company with a DTA of greater than 1 means the company has more liabilities than assets. This company is extremely leveraged and highly risky to invest in or lend to.

What the Total Debt-to-Total Assets Ratio Can Tell You

• The debt-to-total-asset ratio changes over time based on changes in either liabilities or assets.
• Adam received his master’s in economics from The New School for Social Research and his Ph.D. from the University of Wisconsin-Madison in sociology.
• For instance, if his industry had an average DTA of 1.25, you would think Ted is doing a great job.
• The risk of the company being unable to repay its loans increases as the debt-to-asset ratio increases.
• By examining a company’s debt ratio, analysts and investors can gauge its financial risk relative to peers or industry averages.

Stakeholders, especially creditors, may view a high debt ratio as an increased risk, potentially impacting the company’s borrowing costs and terms. The purpose of calculating the debt ratio of a company is to give investors an idea of the company’s financial situation. For example, in the example above, say XYZ reported $2.9 billion in intangible assets, $1.3 billion in PPE, and $1.04 billion in goodwill as part of its total $20.9 billion of assets.

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. Depending on the industry, a higher or lower debt to total assets ratio may be considered not only acceptable, but expected. The higher the total debt to total asset ratio, the more leveraged a company is, and the greater the chance it will fall short in meeting its debt obligations.

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In this case, the company is not as financially stable and will have difficulty repaying creditors if it cannot generate enough income from its assets. This may be advantageous for creditors because they are likely to get their money back if the company defaults on loans. This measure is closely watched by lenders and creditors since they want to know whether the company owes more money than it possesses.

Debt To Asset Ratio Vs Debt To Equity Ratio

If you have time, it is often worthwhile to do the analysis yourself using primary sources, such as the SEC filings used here. 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. If you wanted to evaluate Company V as a potential investment, it would be helpful to have a better understanding of its leverage situation. A ratio below 40% is generally considered good, indicating a lower risk of financial distress. However, industry norms vary, and what’s considered good can differ based on the sector.

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However, it has limitations, like overlooking cash flows and varying significantly across industries. Used prudently, the debt-to-asset ratio offers key insights into a company’s financial stability and its ability to take on additional debt. Also, the more established a company is, the more stable cash flows and stronger relationships with lenders it tends to have. As a result, larger and more mature companies can typically afford to have higher debt ratios than other industries. The debt to asset ratio shows what percentage of the company’s assets are funded by debt, as opposed to equity.

• The higher the total debt to total asset ratio, the more leveraged a company is, and the greater the chance it will fall short in meeting its debt obligations.
• The debt to assets ratio formula is calculated by dividing total liabilities by total assets.
• InvestingPro offers detailed insights into companies’ Total Liabilities / Total Assets including sector benchmarks and competitor analysis.
• A valid critique of this ratio is that the proportion of assets financed by non-financial liabilities (accounts payable in the above example, but also things like taxes or wages payable) are not considered.
• It’s always important to compare a calculation like this to other companies in the industry.
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Understanding the Debt-to-Assets Ratio: A Comprehensive Guide to Financial Leverage and Debt Management

The debt to asset ratio is a measure of how much leverage a company uses to finance its assets. You can use the debt to asset calculator below to quickly measure how much leverage a company uses to finance its assets using debts by entering the required numbers. For example, in the numerator of the debt to asset ratio formula equation, all of the firms in the industry must use either total debt or long-term debt.

A low debt ratio, typically less than 0.5 or 50%, indicates that a company relies more on equity than on borrowed funds to finance its assets. The debt ratio is the ratio of a company’s debts to its assets, arrived at by dividing the sum of all its liabilities by the sum of all its assets. Thus if it is not able to earn enough profits, it may not be able to meet these obligations, thus putting pressure on its growth. They’re dynamic elements that can shape a company’s strategic decisions, influence its cash flow, and ultimately drive its success.

Understanding the Debt-To-Total-Assets Ratio

For information pertaining to the registration status of 11 Financial, please contact the state securities regulators for those states in which 11 Financial maintains a registration filing. In contrast, companies looking to expand or diversify might again increase borrowing, potentially raising the ratio. Understanding where a company is in its lifecycle helps contextualize its debt ratio. While this could indicate aggressive financial practices to seize growth opportunities, it might also mean a higher risk of financial distress, especially if cash flows become inconsistent.

In a low-interest-rate environment, borrowing can be relatively cheap, prompting companies to take on more debt to finance expansion or other corporate initiatives. It offers insights into the company’s long-term solvency and its ability to meet its long-term obligations. A company with a high degree of leverage may thus find it more difficult to stay afloat during a recession than one with low leverage.

As a result it’s slightly more popular with lenders, who are less likely to extend additional credit to a borrower with a very high debt to asset ratio. Conversely, technology startups might have lower capital needs and, subsequently, lower debt ratios. Comparing a company’s debt ratio with industry benchmarks is crucial to assess its relative financial health. The long-term debt ratio focuses specifically on a company’s long-term debt (obligations due in more than a year) relative to its total assets or equity.