Debt-to-asset ratio: What it is and how to calculate it (2024)

As parents, we're the ones who know best when it comes to managing everyday family finances. But have you ever wondered what's going on behind the scenes when you apply for a loan or credit? Chances are, the lender is reviewing your application package, including your credit history and score. They may also evaluate your creditworthiness using different metrics. For businesses, one of those metrics is the debt-to-asset ratio, and for individuals, the debt-to-income ratio. These financial metrics can help you get a better idea of many things, including whether you'll qualify for credit or need to make some improvements before applying, or if a company is financially healthy enough to invest in.

What is the debt-to-asset ratio?

So, what does debt-to-asset ratio mean?

The debt-to-asset ratio is a calculation that assesses the borrowing risk of a company or person. It compares total existing debts to available assets, resulting in a percentage or ratio. The debt-to-asset ratio helps identify the potential borrower's riskiness and liquidity — or their ability to quickly turn assets into cash. It helps lenders decide whether to approve a loan application.

Generally, borrowers with a higher ratio or percentage — because their debts exceed their assets — are a bigger risk to lenders. If the lender decides to take on this risk, they might charge higher interest rates, require a down payment, or request collateral. If the borrower's application doesn't meet the lender's minimum requirements, they may deny the loan or require a cosigner.

Business lenders usually use debt-to-asset ratios. Consumer lenders, on the other hand, are more likely to consider your debt-to-income ratio when evaluating a credit application. Even so, knowing how to calculate the debt-to-asset ratio can help you in other ways. For instance, you can use it to evaluate the liquidity of a company you're considering investing in. The debt-to-asset ratio tells you whether the company can cover their debts or is financially unstable.

How to calculate the debt-to-asset ratio

Calculating the debt-to-asset ratio is pretty simple. You don't have to be a math whiz to figure out how to do it!

Gather your data

To get started, make a list of a company's obligations and their outstanding balance. This includes all types of debt — auto loans, commercial mortgages 🏤, credit cards, and business loans, for example. Companies categorize these outstanding loans and credit obligations as liabilities on their balance sheets.

Public companies listed on a stock exchange must publish their financial statements, including balance sheets, income statements, and statements of cash flows, every quarter and at the end of the year. Usually, you can find a company's recent financial statements on their website.

Next, find the organization's assets. Assets include anything a company owns and uses to make revenue. They also include anything that can easily be turned into cash. Examples include money in checking and savings accounts, inventory, equipment, property, accounts receivable, and short and long-term investments.

List the current value of the company's assets, just like you did for debts. You can find asset values on the company's balance sheet, listed in the assets category.

Step-by-step process to calculate debt-to-asset ratio

Once you have a complete list of the company's debts and assets, you're ready to calculate the debt-to-asset ratio.

1. Sum up all debts

Using your list, add all debts together. The result is the total outstanding debts the company owes.

2. Add all your assets

Next, sum up all asset values. This will give you the total value of all the company's assets.

3. Apply the debt-to-asset ratio formula

Finally, divide total debts by total assets. The result will be a ratio, such as 0.60. You can convert the ratio into a percentage by multiplying the value by 100 and including the percent sign (in this case, that ratio turns into 60%).

Example of debt-to-asset ratio calculation

Let's calculate the debt-to-asset ratio for a company with a few debts and assets so you can see it in practice.

We'll start with a list of debts:


Owed Balance

Credit cards


Business loan


Equipment financing


Long-term loan




Next, let's look at assets:



Checking account balance


Savings account balance






Intangible assets




Using the total debts and total assets, we can calculate the debt-to-asset ratio:

$272,500 total debts / $468,000 total assets = 0.582

To convert the ratio to a percentage, multiply by 100:

0.582 debt-to-asset ratio X 100 = 58.2%

So, we have the number, but what is a good debt-to-asset ratio? The lower the number, the more stable a company or person is. If the debt-to-asset ratio is more than 1, that means the company has more debts than assets and might be a lending risk. If the debt-to-asset ratio is less than 1, the organization has more assets than obligations — a good sign for creditors.

Debt-to-asset ratio versus debt-to-income ratio

While businesses use the debt-to-asset ratio, individuals and families might use a debt-to-income ratio to gauge their financial health 🧑‍⚕️ instead!

So, why don't we use debt-to-asset ratios for personal finance? In a nutshell, it's because unlike a business, a family probably doesn't sell things they own to earn a living. Sure, having a garage sale for a bit of extra cash is normal, but chances are, that happens once or twice a year. Occasionally, you might resell a big-ticket item you no longer use, like a treadmill collecting dust in your closet. But you probably don't put your furniture on the market weekly or hawk your kitchenware 🥄 to your neighbors. After all, you need those things in your home!

That's different for companies, as they rely on their assets to generate income. They use equipment and machinery to produce products, inventory to entice new buyers, cash to pay suppliers, and investments to get passive earnings. Without assets, a company's business model would be unsustainable.

Both metrics show lenders whether there's enough money for a borrower to cover monthly loan payments. A lender needs assurance that you can pay your bills without hardship. Banks and other financial institutions know your essentials come first — groceries, housing, medicine, and utilities. They expect you to pay for those things before sending your loan payments. So if a lender sees your income is just barely covering your needs, it might hesitate to approve you a loan. There would be a risk you wouldn't be able to make your payments.

The higher your debt-to-income ratio, the more risk a lender accepts if they approve a loan. Some lenders have specific debt-to-income criteria they require before they'll consider a loan. You can ask about their criteria before starting a loan application. If you don't meet their requirements, you can work on reducing your debt-to-income ratio before applying.

What is the debt-to-asset ratio used for?

If a bunch of terms are swimming through your head right now, don't worry! Let's look at some real-life examples of debt-to-income and debt-to-asset ratios so you know when they apply.

Everyday situations

Here are a few everyday situations where you might encounter the debt-to-income ratio.

Homeownership and mortgage repayment

Buying a home is a big milestone, and banks want to see that you can afford future payments before approving your mortgage. Let's say you want to buy a house and need a $350,000 mortgage. The interest rate is 7% on a 30-year mortgage. Your pre-tax monthly income is $8,000, and your estimated monthly mortgage payments are $2,328. You have $1,000 in other outstanding monthly debts to pay.

Because the total of your debts and estimated mortgage is $3,328, and you have $8,000 in monthly income, your debt-to-income ratio is 41.6%. Depending on the bank's policies, that might be acceptable — or you might need to work on lowering outstanding debt or increasing income.

Loans and credit cards

If you haven't already applied for a loan or credit card, you — or your teen — probably will one day. These financial tools can help you build credit and buy things you need. During the application process, the bank or lender will review your current debt balances and income to determine whether you can take on more debt and meet payment obligations. A healthy debt-to-income ratio helps make the application process smooth and fast.

Student loan repayments

Let's say you want to go back to college and get your master's degree 🎓 and you need a student loan to help pay for your tuition and books. Your lender will check your debt-to-income ratio to check your ability to make each monthly payment.

How lenders use the debt-to-asset ratio

Like consumer lenders, financial institutions look at the debt-to-asset ratio when deciding whether to extend credit to a business.

Business loans and credit cards

Companies also turn to loans and credit cards for different goals, such as supporting cash flow needs or paying for unexpected expenses. Before approving a business loan or credit card, the lender will evaluate the company's debt-to-asset ratio and liquidity. A company with too much debt relative to expenses might find it harder to get a loan.

Equipment and machinery financing

Businesses purchase equipment and machinery to support office functions, create products, and provide services. A company that wants to finance equipment instead of buying outright will apply for a loan or equipment lease. The lender will check the potential borrower's debt-to-asset ratio to see if they can afford regular debt payments.

Elevate your financial knowledge with Greenlight

Now that you know how debt impacts a lender's loan approval process, you're well on your way to exploring ways to build credit, minimize debts, and improve your family's finances.

As you continue on this path, plug into Greenlight's Learning Center, made for parents, kids, and families. It has hundreds of articles that make complex financial concepts seem easy. You can also check out our investing app, which shows kids and teens basic concepts of building wealth. Get started with Greenlight today and get one month, on us!

Debt-to-asset ratio: What it is and how to calculate it (2024)


Debt-to-asset ratio: What it is and how to calculate it? ›

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.

How do you calculate debt to assets ratio? ›

Total liabilities will have to be divided by the company's total assets to obtain the debt-to-asset ratio.

How do you calculate the debt ratio? ›

To calculate the debt-to-assets ratio, divide your total debt by your total assets. The larger your company's debt ratio, the greater its financial leverage. Debt-to-equity ratio : This is the more common debt ratio formula. To calculate it, divide your company's total debt by its total shareholder equity.

What is the rule of thumb for debt to asset ratio? ›

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.

What is the formula for the asset ratio? ›

The asset turnover ratio measures the efficiency of a company's assets in generating revenue or sales. It compares the dollar amount of sales (revenues) to its total assets as an annualized percentage. Thus, to calculate the asset turnover ratio, divide net sales or revenue by the average total assets.

What is debt to asset ratio for? ›

The debt-to-total assets ratio is primarily used to measure a company's ability to raise cash from new debt. That evaluation is made by comparing the ratio to other companies in the same industry. The higher a company's debt-to-total assets ratio, the more it is said to be leveraged.

How to improve debt to asset ratio? ›

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.

What is a good debt ratio ratio? ›

35% or less: Looking Good - Relative to your income, your debt is at a manageable level. You most likely have money left over for saving or spending after you've paid your bills. Lenders generally view a lower DTI as favorable.

What's a good debt ratio? ›

Your debt-to-income (DTI) ratio is how much money you earn versus what you spend. It's calculated by dividing your monthly debts by your gross monthly income. Generally, it's a good idea to keep your DTI ratio below 43%, though 35% or less is considered “good.”

What is an example of a debt ratio? ›

Let's say you have 600,000$ in total assets and 150,000$ in liabilities. To calculate the debt ratio, divide the liability (150,000$ ) by the total assets (600,000$ ). This results in a debt ratio of 0.25 or 25 percent.

What is the formula for debt to asset ratio in Excel? ›

The formula to calculate the debt ratio is equal to total debt divided by total assets.

What is a good household debt to asset ratio? ›

If the current assets of a household are more than twice the current liabilities, then that household is generally considered to have good short‐term financial strength. If current liabilities exceed current assets, then the household may have problems meeting its short‐term obligations.

How to calculate debt ratio from balance sheet? ›

The debt ratio is calculated by dividing a company's total liabilities by its total assets. This calculation produces a percentage or decimal that reflects the degree to which a company finances its assets with debt.

How to calculate debt-to-equity ratio? ›

The 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.

What is the difference between assets and debt? ›

The difference between assets and liabilities or a business's debt is that assets give a business future economic benefit, helping your business grow in equity and value while liabilities are a company's debt which it needs to repay in the future.

What does a debt to total assets ratio of 80% mean? ›

Because it means creditors amount is 80% of the total assets, they can get full recovery of their amount lended in case of closure of business.

How to calculate debt-to-equity ratio calculator? ›

You can calculate your business' debt to equity ratio (D/E) by dividing the total liabilities by shareholders' equities. In other words, it is represented by the total debt divided by shareholder shares. This essential information is present in the balance sheet of every company.


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