The debt-to-asset ratio is not useful unless you have comparative data such as you get through trend or industry analysis. Business managers and financial managers have to use good judgment https://www.bookstime.com/ and look beyond the numbers in order to get an accurate debt-to-asset ratio analysis. Another issue is the use of different accounting practices by different businesses in an industry.

• This indicates 40% of the corporation’s assets are being financed by the creditors, and the owners are providing 60% of the assets’ cost.
• On the opposite end, Company C seems to be the riskiest, as the carrying value of its debt is double the value of its assets.
• The calculation considers all of the company’s debt, not just loans and bonds payable, and considers all assets, including intangibles.
• We also reference original research from other reputable publishers where appropriate.
• Furthermore, prospective investors may be discouraged from investing in a company with a high debt-to-total-assets ratio.

In the end, while the debt/asset ratio is a good guide, it must be considered within the context of the company’s specific situation. There are things a company can do to improve its debt/asset ratio, such as a debt-equity swap, an additional stock issue or selling assets to pay down some of the debt. Companies will choose various strategies depending on the circumstances and how much they want to improve that debt/asset ratio number. Some companies may be nearly where they want to be and can handle lowering the ratio with capital already on hand. 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 ratio that is less than 1 or a debt-to-total-assets ratio of less than 100% means that the company has greater assets than liabilities.

Debt-to-Asset Ratio Formula & Calculation

Investors and accountants use debt ratios to assess the risk that a company is likely to default on its obligations. The debt-to-equity ratio, also known as the “leverage ratio,” is a financial ratio that measures the amount of debt a company has compared to its equity. To calculate the debt-to-equity ratio, simply divide a company’s total liabilities by its total shareholder equity.

All you’ll need is a current balance sheet that displays your asset and liability totals. Rosemary Carlson is a finance instructor, author, and consultant who has written about business and personal finance for The Balance since 2008. For example, the debt ratio of a utility company is in all likelihood going to be higher than a software company – but that does not mean that the software company is less risky. If hypothetically liquidated, a company with more assets than debt could still pay off its financial obligations using the proceeds from the sale.

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A company with a high degree of leverage may thus find it more difficult to stay afloat during a recession than one with low leverage. It should be noted that the total debt measure does not include short-term liabilities such as accounts payable and long-term liabilities such as capital leases and pension plan obligations. Total-debt-to-total-assets is a leverage ratio that defines the total amount of debt relative to assets owned by a company. Using this metric, analysts can compare one company’s leverage with that of other companies in the same industry.

For example, in the numerator of the equation, all of the firms in the industry must use either total debt or long-term debt. You can’t have some firms using total debt and other firms using just long-term debt or your data will be corrupted and you will get no helpful data. Divide the result from step one (total liabilities or debt—TL) by the result from step two (total assets—TA).

Company

Although its debt balance is more than three times higher than Costco, it carries proportionally less debt compared to total assets compared to the other two companies. A ratio greater than 1 shows that debt to asset ratio a considerable portion of the assets is funded by debt. A high ratio also indicates that a company may be putting itself at risk of defaulting on its loans if interest rates were to rise suddenly.