Long Term Debt to Assets Ratio Formula & Meaning

What is Long Term Debt To Assets Ratio

Long term debt to assets ratio is a financial ratio that measures the number of the company’s assets funded by the long-term debt. The long-term debt to assets ratio shows the amount of the company’s long-term debt for each dollar of the assets.

The long term debt to assets ratio can be computed by dividing long-term debt by total assets. So, the value of 1.00 means the company finance all assets with long-term debt. Thus, a good long term debt to assets ratio is a lower number which indicates the company had low financial risk due to its low leverage.

While the higher ratio reflects that the company financed its all assets with long-term debts which means the company will be responsible for its long term liabilities obligations for a while and it may not be able to repay its debts. Then, the higher ratio, the more debt overwhelms the company’s operating profit.

However, too low debt to assets ratio is not such a good number due to not taking advantage of the tax deductibility by interest expense.

Long term Debt to Assets Ratio Formula

The long term debt to assets ratio can be calculated by dividing the company’s long-term debt (long-term liabilities) by the company’s total assets, or the following long term debt to assets ratio formula:

LT Debt/Assets = Long-term debt / Total assets

or

LT Debt/Assets% = (Long-term debt / Total assets) x 100

For example, the Feriors company has total assets of $20,000 and long-term liabilities of $1,000 in this accounting period.

The long term debt to assets ratio will be 1,000 / 20,000 = 0.05 times (or 5%). This means the Feriors company has 5% of long term debt (5 cents) per $1 of assets.

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