Total-Debt-to-Total-Assets Ratio Definition, Formula & Example

KEY TAKEAWAYS

• The ratio of total-debt-to-total-assets offers a look at how much a company finances assets using debt. 
• This formula takes all types of debt and assets into account. This includes intangible assets.
• If your total-debt-to-total-assets ratio is 0.3, that means that 30% of your assets fall under credit. The remaining 70% falls under your own assets. 

What is the Total-Debt-to-Total-Assets Ratio?

The total-debt-to-total-assets ratio is a metric that indicates a company’s overall financial health. A higher debt to assets ratio may mean that a company is less stable. Companies with more assets than debt obligations are a more worthwhile investment option. They may have a better leverage ratio in their industry than other similar companies. 

Debt to Asset Ratio Formula

A ratio of less than one means that a company has more current assets than current liabilities. A ratio of one means that a company has equivalent debts and assets. A ratio of greater than one means that a company owes more in debt than they possess in assets.

Real-World Example of the Total-Debt-to-Total-Assets Ratio

Let’s say a company has $5,000 owed on accounts payable. This is short-term debt, but debt nonetheless. The same company has $90,000 in long-term debt like business loans and other business debt. The total debt is $95,000.

The same company has a variety of assets: 

• Cash on-hand – $20,000
• Accounts receivable – $35,000
• Stock/inventory – $72,000
• Equipment/property – $40,000

Now you divide the total debts by the total assets to get an equity ratio: $95,000/$167,000 = 56.9% debt to asset ratio. Debt funds 56.9% of the company’s total assets.

Limitations of the Total-Debt-to-Total-Assets Ratio

This simplified formula doesn’t compare the quality of debts and assets. Some assets may be of higher quality and thus have a higher perceived value. The formula also offers a snapshot of only one point in time. Review the balance sheet to assess trends over time. This offers a more accurate evaluation of a company’s financial performance. 

How to Get a Low Total-Debt-to-Total-Assets Ratio

If you want your company to appeal to potential investors, lower your debt ratio. You can achieve this in a combination of two ways. First, pay down your short-term and long-term debts. Then look for ways to increase your assets. The bigger the gap between these two numbers, the better your ratio is. It may be easier for you to focus on one over the other. 

For example, your total debts are $25,000 and your total assets are $50,000. This gives you a ratio of .5 or 50%. Your debts are equal to half of your assets. If you cannot pay down debt, try increasing your assets. By increasing your assets to $60,000 you lower your debts to assets ratio to a more desirable .417 or 41.7%.

Benefits and Risks of a Low Total-Debt-to-Total-Assets Ratio

Investors want to partner with financially sound companies. A track record of low debt and higher assets indicates that your team is good at managing money. Low debt makes your company more appealing to lenders, too.

If you already have a lot of debt, lenders may not want to issue additional loans. 

Debt Ratio vs Long-Term Debt to Asset Ratio

The term ‘debt ratio’ is a shorter name for total-debt-to-total-assets ratio. Experts measure the long-term debt to asset ratio a little differently. They don’t consider short-term debts in the formula. Instead, they only total any long-term liabilities that are due more than one year out. 

Summary

The calculation for total-debt-to-total-assets tells you how much debt you use for business financings. The formula includes all debts and all assets, including intangibles. A lower debt-to-assets-ratio can indicate that your business is better at managing funds. This can make you more appealing to lenders when you do need additional funding.