Definition of Debt to Total Assets Ratio
The debt to total assets ratio is an indicator of a company’s financial leverage. It tells you the percentage of a company’s total assets that were financed by creditors. In other words, it is the total amount of a company’s liabilities divided by the total amount of the company’s assets.
Note: Debt includes more than loans and bonds payable. Debt is the total amount of all liabilities (current liabilities and long-term liabilities).
Example of Debt to Total Assets Ratio
Let’s assume that a corporation has $100 million in total assets, $40 million in total liabilities, and $60 million in stockholders’ equity. This corporation’s debt to total assets ratio is 0.4 ($40 million of liabilities divided by $100 million of assets), 0.4 to 1, or 40%. This indicates 40% of the corporation’s assets are being financed by the creditors, and the owners are providing 60% of the assets’ cost. Generally, the higher the debt to total assets ratio, the greater the financial leverage and the greater the risk.
How To Be Used
As with all financial ratios, it is best for a company to compare its debt to total assets ratio to:
- its ratio at an earlier date
- its targeted ratio…its goal
- the ratios at companies in the same industry
