What is Debt to Assets Ratio
Debt to assets ratio is a financial ratio that measures the total amount of debt compared to the total assets of a company. The debt to asset ratio is used to indicate the percentage of assets that are being financed with debt. Therefore, the lower debt to asset ratio, the lower debt compared to the assets.
The debt to assets ratio is a comparison between the total debt and total assets of a company. It can be calculated by dividing the total debt by the total assets.
When the debt to assets ratio is higher than 1 means the company had higher total debt than the total assets. To put it simply, the company’s assets are acquired by debt (borrowed funds used to acquire the company’s assets). The higher the ratio, the higher degree of leverage and financial risk.
Normally, investors use the debt to asset ratio to make sure the company is solvent. Solvency is a company’s ability to survive for a long period of time, it is the ability to pay its debts when they are due.
Debt to Assets Ratio Formula
The debt to assets ratio can be computed by dividing the total debt by the total assets, or the following debt to assets ratio formula:
Debt/Assets = Total Debt / Total Assets
Let’s say the Feriors company had the following financial results:
- Total debt of $100
- Total assets of $200
Debt to Asset Ratio = 100 / 200 = 0.5 (or 50%)
This means the company had total debt of only 50% of the total assets.
Frequently Asked Questions
The debt to assets ratio is a financial ratio that measures the total amount of debt compared to the total assets of a company. The debt to asset ratio is used to indicate the percentage of assets that are being financed with debt.
The debt to assets ratio can be calculated by dividing the total debt by the total assets as the following formula: D/A ratio = Total Debt / Total Assets
The lower the debt to assets ratio, the lower degree of leverage and financial risk.
