Debt to Assets Ratio | Debt to Asset Ratio
Description: The debt to assets ratio (or debt to asset ratio) is an indicator of the proportion of a company's assets that are being financed with debt, rather than equity. A ratio greater than 1 indicates 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 a business is located in a highly cyclical industry where cash flows can suddenly decline. 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.
Formula: To calculate the debt to assets ratio, divide total liabilities by total assets. The formula is:
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.
Example: ABC Company has total liabilities of $1,500,000 and total assets of $1,000,000. Its debt to assets ratio is:
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.
The debt to assets ratio is also known as the debt ratio.