Debt-to-Assets Ratio: How to Calculate Debt-to-Assets Ratio

A debt-to-assets ratio is a type of leverage ratio that compares a company's debt obligations (both short-term debt and long-term debt) to the company's total assets. It is calculated using the following formula:

Debt-to-Assets Ratio = Total Debt / Total Assets.

If the debt-to-assets ratio is greater than one, a business has more debt than assets. If the ratio is less than one, the business has more assets than debt. A company with a high ratio of total debt to total assets has a relatively high degree of leverage (DoL) and may lack the financial flexibility of a business where assets outweigh debts.

A company's debt-to-assets ratio can reveal information about its capital structure and offer a window into the company's leverage. The more leveraged a business is, the more it relies on its lenders for continued solvency. A company with high debt can suffer when interest rates rise, forcing the company to channel its revenue toward loan repayments instead of paying salaries or buying new equipment.

When a company's assets exceed its total amount of debt, the company enjoys more financial flexibility. A small business with lower debt can pay higher salaries and expand more aggressively since it does not need to spend a lot of money paying down debt. On the other hand, a reasonable amount of debt can benefit a company. Loans provide immediate cash flow, and cash can be spent on expanding a business.

Calculating a total-debt-to-total-assets ratio requires finding two inputs: total debt and total assets.

1. 1. Calculate total debt. A company's total debt reflects both short-term debt (which comes due within one year) and long-term debt (which will be repaid in more than one year's time). In corporate finance, total debt does not include liabilities. Short-term liabilities (like employee salaries) and long-term liabilities (like pension plans) are an inherent part of doing business but are not categorized as debt.
2. 2. Calculate total assets. A business's total assets include both tangible assets (equipment, merchandise, cash-on-hand, total liabilities to be paid back by borrowers), and intangible assets (copyrights, patents, and goodwill).
3. 3. Input these numbers into the formula. Once you have gathered these inputs, plug them into the debt-to-assets ratio formula: Debt-to-Asset Ratio = Total Debt / Total Assets.

When a business reports a debt-to-assets ratio that is greater than one, this means it has more debt than assets. If the ratio is less than one, the business has more assets than it does debt.

Always analyze debt-to-assets ratios in the context of a particular industry. For instance, utility companies are known for taking on high levels of debt, so if a power company's debt-to-assets ratio shows a high degree of leverage, an investor would compare that financial ratio to the industry average. If its competitors have a similarly high ratio, the power company is probably doing fine, financially.

The terms "debt ratio," "debt-to-assets ratio," and "total-debt-to-total-assets ratio" are all synonymous. All three measure total debt relative to total assets. If a financial ratio is labeled "long-term-debt-to-assets ratio," it will only look at the long-term debt that comes due in more than one year's time.

All investments and investment strategies entail inherent risks and introduce the potential for financial loss or the depreciation of assets. The information presented in this article is for educational, informational, and referential purposes only. Consult a professional investment advisor before making any financial commitments.

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