Debt to Assets Ratio | Nonprofit Accounting Basics (2024)

FAQs

What is the debt-to-asset ratio for dummies? ›

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.

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.

Borrow less than you're allowed

Find out the home-related costs you can afford each month. Calculate your gross debt service ratio. Your total debt (for housing, cars and credit cards) shouldn't be more than 40% of your gross income.

It implies that the business is extremely leveraged. If the ratio is less than 1, the company has more assets than liabilities. The company can fund its liabilities by selling assets if need be. The lower the debt-to-asset ratio, the better it is for the company.

At its core, the debt ratio compares a company's total debt to its total assets. It provides a clear picture of the company's financial obligations contrasted with what it owns. In a nutshell, it's the ratio of what you owe to what you have.

For creditors, a lower debt-to-asset ratio is preferred as it means shareholders have contributed a large portion of the funds to the business, and thus creditors are more likely to be paid.

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).

If your debt ratio does not exceed 30%, the banks will find it excellent. Your ratio shows that if you manage your daily expenses well, you should be able to pay off your debts without worry or penalty. A debt ratio between 30% and 36% is also considered good.

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.

A lower debt ratio indicates that a company is less risky. If the value of debts to asset ratio is more than 1, it indicates that liabilities or debts are more than assets, and it can result in bankruptcy in the near future and it will be very risky to invest in such a company.

What is too high for debt to ratio? ›

Key takeaways

Debt-to-income ratio is your monthly debt obligations compared to your gross monthly income (before taxes), expressed as a percentage. A good debt-to-income ratio is less than or equal to 36%. Any debt-to-income ratio above 43% is considered to be too much debt.

The 20/10 rule follows the logic that no more than 20% of your annual net income should be spent on consumer debt and no more than 10% of your monthly net income should be used to pay debt repayments.

Tesla's operated at median total debt / total assets of 14.3% from fiscal years ending December 2019 to 2023. Looking back at the last 5 years, Tesla's total debt / total assets peaked in December 2019 at 42.5%. Tesla's total debt / total assets hit its 5-year low in December 2022 of 7.0%.

Apple's operated at median total debt / total assets of 37.6% from fiscal years ending September 2019 to 2023. Looking back at the last 5 years, Apple's total debt / total assets peaked in September 2021 at 38.9%. Apple's total debt / total assets hit its 5-year low in September 2019 of 31.9%.

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.

Short-term debt to total assets ratio shows how much of the enterprise's total assets are financed using loans and financial debts lasting for one year or less.

For companies with low debt to asset ratios, such as 0% to 30%, the main advantage is that they would incur less interest expense and also have greater strategic flexibility. For example, a company might determine that ceasing to offer a particular product or service would be in their best long-term interest.