Debt to assets ratio — AccountingTools (2024)

What is the Debt to Assets Ratio?

The debt to assets ratio indicates the proportion of a company's assets that are being financed with debt, rather than equity. The ratio is used to determine the financial risk of a business.A ratio greater than 1 shows that a considerable proportion of assets are being funded with debt, while a low ratio indicates that the bulk of asset funding is coming from equity.A ratio greater than 1 also indicates that a company may be putting itself at risk of not being able to pay back its debts, which is a particular problem when the business is located in a highly cyclical industry where cash flows can suddenly decline. A company may also be at risk of nonpayment if its debt is subject to sudden increases in interest rates, as is the case with variable-rate debt.

When using this ratio, track it on a trend line. 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.

Possible requirements by lenders to counteract this problem are the use of restrictive covenants that force excess cash flow into debt repayment, restrictions on alternative uses of cash, and a requirement for investors to put more equity into the company.

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How to Calculate the Debt to Assets Ratio

To calculate the debt to assets ratio, divide total liabilities by total assets. The formula is as follows:

Total liabilities ÷ Total assets

A variation on the formula is to subtract intangible assets (such as goodwill) from the denominator, to focus on the tangible assets that were more likely acquired with debt. This approach works well when a business has engaged in a large number of acquisitions, and so has a substantial amount of goodwill on its balance sheet.

Example of the Debt to Assets Ratio

ABC Company has total liabilities of $1,500,000 and total assets of $1,000,000. Its debt to assets ratio is:

$1,500,000 Liabilities ÷ $1,000,000 Assets

= 1.5:1 Debt to assets ratio

The 1.5 multiple in the ratio indicates a very high amount of leverage, so ABC has placed itself in a risky position where it must repay the debt by utilizing a small asset base.

Terms Similar to the Debt to Assets Ratio

The debt to assets ratio is also known as the debt ratio.

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Debt to assets ratio —  AccountingTools (2024)


What is the debt to assets ratio ______? ›

The debt ratio, or total debt-to-total assets, is calculated by dividing a company's total debt by its total assets. It is also called the debt-to-assets ratio. It is a leverage ratio that defines how much debt a company carries compared to the value of the assets it owns.

What if debt to asset ratio is more than 1? ›

A company's debt ratio can be calculated by dividing total debt by total assets. A debt ratio of greater than 1.0 or 100% means a company has more debt than assets while a debt ratio of less than 100% indicates that a company has more assets than debt.

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 does an 80% debt to assets ratio mean? ›

Debt-to-total-assets ratio = 0.8 or 80% This means that 80% of Company B's assets are financed by debt, which indicates that the company has a higher risk of defaulting on its loans.

What is a good debt to asset ratio? ›

There is no perfect score or ideal debt to asset ratio. As with all financial metrics, a “good ratio” is dependent upon many factors, including the nature of the industry, the company's lifecycle stage, and management preference (among others).

What is a good debt to asset ratio for a family? ›

A debt ratio below 30% is excellent. Above 40% is critical. Lenders could deny you a loan.

Is a 50% debt to asset ratio good? ›

Signal: Under . 5 or 50% is better; over 1.0 or 100% would indicate that liabilities exceed assets, which is not desirable; upward trend may be cause for concern. Calculation: Total liabilities may also be divided by total income or total capital for a different emphasis.

Is 0.5 a good debt to asset ratio? ›

There's no ideal figure, but a ratio of less than 0.5 is generally preferred. You can evaluate the debt to asset ratio of a company over different periods, comparing them to competitors in their industry.

What are the limitations of debt to asset ratio? ›

The ratio has its limitations. For instance, it does not distinguish between types of assets and does not capture a company's entire set of financial obligations. Therefore, it should be used in conjunction with other financial metrics such as liquidity ratios for a comprehensive analysis.

What is a 60% debt to assets ratio? ›

This ratio examines the percent of the company that is financed by debt. If a company's debt to assets ratio was 60 percent, this would mean that the company is backed 60 percent by long term and current portion debt. Most companies carry some form of debt on its books.

Is a debt ratio of 75% bad? ›

Interpreting the Debt Ratio

If the ratio is over 1, a company has more debt than assets. If the ratio is below 1, the company has more assets than debt. Broadly speaking, ratios of 60% (0.6) or more are considered high, while ratios of 40% (0.4) or less are considered low.

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 does the debt to assets ratio measure in Quizlet? ›

What is the Debt Ratio? Total Liabilities/Total Assets. The debt ratio indicates the percentage of the total asset amounts stated on the balance sheet that is owed to creditors. A high debt ratio indicates that a corporation has a high level of financial leverage.

Is the debt to assets ratio a liquidity ratio? ›

The debt to asset ratio is an indicator of financial leverage, whereas liquidity ratio indicates the capacity to meet short-term obligations. Hence the option is incorrect.

What is the meaning of debt to ratio? ›

Your debt-to-income ratio (DTI) is all your monthly debt payments divided by your gross monthly income. This number is one way lenders measure your ability to manage the monthly payments to repay the money you plan to borrow. Different loan products and lenders will have different DTI limits.

What does the debt to net assets ratio mean? ›

The Net Debt to Assets Ratio is a measure of the financial leverage of the company. It tells you what percentage of the firm's Assets is financed by Net Debt and is a measure of the level of the company's leverage. It is calculated as Net Debt divided by Total Assets.


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