# What is the debt to total assets ratio?

In most cases, this is considered a very risky sign, indicating that the company may be at risk of bankruptcy. 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. Financial data providers calculate it using only long-term and short-term debt (including current portions of long-term debt), excluding liabilities such as accounts payable, negative goodwill, and others.

A debt ratio greater than 1.0 (100%) tells you that a company has more debt than assets. Meanwhile, a debt ratio of less than 100% indicates that a company has more assets than debt. Used in conjunction with other measures of financial health, the debt ratio can help investors determine a company’s risk level. So if a company has total assets of $100 million and total debt of $30 million, its debt ratio is 0.3 or 30%.

As discussed earlier, a lower debt ratio signifies that the business is more financially solid and lowers the chance of insolvency. With this information, investors can leverage historical data to make more informed investment decisions on where they think the company’s financial health may go. 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. In other words, the ratio does not capture the company’s entire set of cash “obligations” that are owed to external stakeholders – it only captures funded debt. In the above-noted example, 57.9% of the company’s assets are financed by funded debt. Analysts will want to compare figures period over period (to assess the ratio over time), or against industry peers and/or a benchmark (to measure its relative performance).

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The debt to asset ratio is a financial metric used to help understand the degree to which a company’s operations are funded by debt. It is one of many leverage ratios that may be used to understand a company’s capital structure. The debt ratio, or total debt-to-total assets, is calculated by dividing a company’s total debt by its total assets. It is a leverage ratio that defines how much debt a company carries compared to the value of the assets it owns. In the consumer lending and mortgage business, two common debt ratios used to assess a borrower’s ability to repay a loan or mortgage are the gross debt service ratio and the total debt service ratio. As noted above, a company’s debt ratio is a measure of the extent of its financial leverage.

The result is that Starbucks has an easy time borrowing money—creditors trust that it is in a solid financial position and can be expected to pay them back in full. 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. A ratio that is greater than 1 or a debt-to-total-assets ratio of more than 100% means that the company’s liabilities are greater than its assets. A ratio that is less than 1 or a debt-to-total-assets ratio of less than 100% means that the company has greater assets than liabilities. 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. Furthermore, prospective investors may be discouraged from investing in a company with a high debt-to-total-assets ratio.

Common debt ratios include debt-to-equity, debt-to-assets, long-term debt-to-assets, and leverage and gearing ratios. 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.

Is this company in a better financial situation than one with a debt ratio of 40%? Other common financial stability ratios include times interest earned, days sales outstanding, inventory turnover, etc. These measures take into account different figures from the balance sheet other than just total assets and liabilities. The debt-to-total-assets how are retained earnings different from revenue ratio is a very important measure that can indicate financial stability and solvency. This ratio shows the proportion of company assets that are financed by creditors through loans, mortgages, and other forms of debt. It’s also important to understand the size, industry, and goals of each company to interpret their total debt-to-total assets.

- To gain the best insight into the total debt-to-total assets ratio, it’s often best to compare the findings of a single company over time or the ratios of similar companies in the same industry.
- Both ratios, however, encompass all of a business’s assets, including tangible assets such as equipment and inventory and intangible assets such as copyrights and owned brands.
- Meanwhile, a debt ratio of less than 100% indicates that a company has more assets than debt.
- If the calculation yields a result greater than 1, this means the company is technically insolvent as it has more liabilities than all of its assets combined.
- Analysts will want to compare figures period over period (to assess the ratio over time), or against industry peers and/or a benchmark (to measure its relative performance).
- Our writing and editorial staff are a team of experts holding advanced financial designations and have written for most major financial media publications.

As shown below, total debt includes both short-term and long-term liabilities. The debt ratio indicates the percentage of the total asset amounts (as reported on the balance sheet) that is owed to creditors. There is a sense that all debt ratio analysis must be done on a company-by-company basis. Balancing the dual risks of debt—credit risk and opportunity cost—is something that all companies must do. A debt-to-equity ratio of 1.5 would indicate that the company in question has $1.50 of debt for every $1 of equity. To illustrate, suppose the company had assets of $2 million and liabilities of $1.2 million.

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This indicates 40% of the corporation’s assets are being financed by the creditors, and the owners are providing 60% of the assets’ cost. Generally, the higher the debt to total assets ratio, the greater the financial leverage and the greater the risk. The debt to total assets ratio is an indicator of a company’s financial leverage. It tells you the percentage of a company’s total assets that were financed by creditors. In other words, it is the total amount of a company’s liabilities divided by the total amount of the company’s assets.

Because the total debt to assets ratio includes more of a company’s liabilities, this number is almost always higher than a company’s long-term debt to assets ratio. A company’s total debt-to-total assets ratio is specific to that company’s size, industry, sector, and capitalization strategy. For example, start-up tech companies are often more reliant on private investors and will have lower total debt-to-total-asset calculations.

From a pure risk perspective, lower ratios (0.4 or lower) are considered better debt ratios. Since the interest on a debt must be paid regardless of business profitability, too much debt may compromise the entire operation if cash flow dries up. Companies unable to service their own debt may be forced to sell off assets or declare bankruptcy. What counts as a good debt ratio will depend on the nature of the business and its industry. Generally speaking, a debt-to-equity or debt-to-assets ratio below 1.0 would be seen as relatively safe, whereas ratios of 2.0 or higher would be considered risky. Some industries, such as banking, are known for having much higher debt-to-equity ratios than others.

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%. A company can improve its debt ratio by cutting costs, increasing revenues, refinancing its debt at lower interest rates, improving cash flows, increasing equity financing, and possibly restructuring. Investors and lenders calculate the debt ratio of a company from its financial statements. Keep reading to learn more about what these ratios mean and how they’re used by corporations.

## What Does a Debt-to-Equity Ratio of 1.5 Indicate?

A ratio greater than 1 shows that a considerable amount of a company’s assets are funded by debt, which means the company has more liabilities than assets. A high ratio indicates that a company may be at risk of default on its loans if interest rates suddenly rise. A ratio below 1 means that a greater portion of a company’s assets is funded by equity. A higher debt-to-total-assets ratio indicates that there are higher risks involved because the company will have difficulty repaying creditors. The total debt-to-total assets formula is the quotient of total debt divided by total assets.

The same principal amount is more expensive to pay off at a 10% interest rate than it is at 5%. Debt ratios can be used to describe the financial health of individuals, businesses, or governments. It gives a fast overview of how much debt a firm has in comparison to all of its assets. Because public companies https://www.kelleysbookkeeping.com/what-is-accounts-payable-what-is-the-process-and/ must report these figures as part of their periodic external reporting, the information is often readily available. 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.