This can make you more appealing to lenders when you do need additional funding. The debt-to-total-assets ratio is important for companies and creditors because it shows how financially stable a company is. Common debt ratios include debt-to-equity, debt-to-assets, long-term debt-to-assets, and leverage and gearing ratios. So if a company has total assets of $100 million and total debt of $30 million, its debt ratio is 0.3 or 30%. Is this company in a better financial situation than one with a debt ratio of 40%?

If you have time, it is often worthwhile to do the analysis yourself using primary sources, such as the SEC filings used here. If you’re ready to learn your company’s debt-to-asset ratio, here are a few steps to help you get started. Calculating your business’s debt-to-asset ratio can provide interested parties with the numbers they need to make a decision on investing in or loaning funds to your company. From the calculated ratios above, Company B appears to be the least risky considering it has the lowest ratio of the three. 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.

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.

• It is calculated by dividing the total liabilities of a business by its total assets.
• A steadily rising D/E ratio may make it harder for a company to obtain financing in the future.
• A high ratio referenced to an industry benchmark can be an indication that a company is highly leveraged and subject to higher risk.
• The higher a company’s Debt Ratio, the more leveraged, or ‘risky,’ a company is.
• Total assets may include both current and non-current assets, or certain assets only depending on the discretion of the analyst.

The debt to total assets ratio describes how much of a company’s assets are financed through debt. 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. Highly leveraged companies may be putting themselves at risk of insolvency or bankruptcy depending upon the type of company and industry. As with all other ratios, the trend of the total-debt-to-total-assets ratio should be evaluated over time. This will help assess whether the company’s financial risk profile is improving or deteriorating.

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They may have a better leverage ratio in their industry than other similar companies. Debt-to-equity (D/E) ratio can help investors identify highly leveraged companies that may pose risks during business downturns. Investors can compare a company’s D/E ratio with the average for its industry and those of competitors to gain a sense of a company’s reliance on debt. In fact, debt can enable the company to grow and generate additional income. But if a company has grown increasingly reliant on debt or inordinately so for its industry, potential investors will want to investigate further. Debt-to-equity (D/E) ratio is used to evaluate a company’s financial leverage and is calculated by dividing a company’s total liabilities by its shareholder equity.

The periods and interest rates of various debts may differ, which can have a substantial effect on a company’s financial stability. In addition, the debt ratio depends on accounting information which may construe or manipulate account balances as required for external reports. If the firm raises money through debt financing, the investors who hold the stock of the firm maintain their control without increasing their investment.

How to Calculate Debt-To-Total-Assets Ratio

Tesla’s ratio is particularly striking, especially considering that they have decreased their debts substantially in recent years. 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 higher debt-to-total-assets ratio indicates that there enrolled agent vs cpa are higher risks involved because the company will have difficulty repaying creditors. If its assets provide large earnings, a highly leveraged corporation may have a low debt ratio, making it less hazardous. Contrarily, if the company’s assets yield low returns, a low debt ratio does not automatically translate into profitability.

To illustrate, suppose the company had assets of $2 million and liabilities of $1.2 million. Since equity is equal to assets minus liabilities, 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.

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. Debt ratio is a financial ratio that indicates the percentage of a company’s assets that are provided via debt. It is the ratio of total debt (short-term and long-term liabilities) and total assets (the sum of current assets, fixed assets, and other assets such as ‘goodwill’). This simplified formula doesn’t compare the quality of debts and assets.

What is an acceptable Total Debt to Asset Ratio?

An increasing trend indicates that a business is unwilling or unable to pay down its debt, which could indicate a default at some point in the future and possible bankruptcy. 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. The result means that Apple had $1.80 of debt for every dollar of equity. It’s important to compare the ratio with that of other similar companies. Ted’s .5 DTA is helpful to see how leveraged he is, but it is somewhat worthless without something to compare it to.

Understanding the Debt-To-Total-Assets Ratio

On the other hand, a change in total assets will lead to a change in the debt-to-total asset ratio in the opposite direction, either positive or negative. If a company has a negative debt ratio, this would mean that the company has negative shareholder equity. In most cases, this is considered a very risky sign, indicating that the company may be at risk of bankruptcy. 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. A debt ratio greater than 1.0 (100%) tells you that a company has more debt than assets.

You will need to run a balance sheet in your accounting software application in order to obtain your total assets and total liabilities. Certain sectors are more prone to large levels of indebtedness than others, however. Capital-intensive businesses, such as manufacturing or utilities, can get away with slightly higher debt ratios when they are expanding operations.

How to Calculate the Debt-to-Asset Ratio

It affects the company’s ability to take on new debt, its ability to attract investors, and its ability to obtain credit. Higher Total Debt to Asset Ratios may increase the cost of borrowing, limit the amount of credit available, and make it more difficult for investors to consider the company as a worthwhile investment. On the other hand, lower Total Debt to Asset Ratios can make it easier for companies to obtain financing, attract investors and make positive investments that can increase their success. The Debt to Asset Ratio is a crucial metric for understanding the financial structure of a company. In essence, it indicates the proportion of a company’s assets that are financed by debt as opposed to equity. Another consideration is that companies with low debt maintain the option of raising debt capital in the future under more favourable 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. Companies with high debt-to-asset ratios may be at risk, especially if interest rates are increasing.

Adam Hayes, Ph.D., CFA, is a financial writer with 15+ years Wall Street experience as a derivatives trader. Besides his extensive derivative trading expertise, Adam is an expert in economics and behavioral finance. 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. He is a CFA charterholder as well as holding FINRA Series 7, 55 & 63 licenses.