Debt-To-Assets Ratio: Meaning, Formula, And What’s A Good Ratio

Unfortunately it is not always easy for firms to ensure all debt to asset ratios are calculated the same. Some businesses may define their assets and liabilities differently than others. A business whose debt to asset ratio is above one indicates that its funds are entirely covered by debt or alternative financing. This is worrisome for the company in question because it puts them at high risk for defaulting on their loan, or worse, going bankrupt. After calculating your debt to asset ratio, it’s used to better understand your company and where it stands financially.

Interestingly, as the farm size increased, the share of farms with a ratio of less than 0.15 decreased. However, when looking at the other ranges of debt-to-asset ratios—0.15 to 0.30, 0.30 to 0.45, and 0.45 to 0.60—the shares of farms in each range increased as the farm size increased. Compared to medium-sized and large grain farms, small farms constitute a larger share of financially strong (less than 0.15; 0.15 to 0.30) farms in Illinois. In 2003, 31.60% of small grain farms had a debt-to-asset ratio of less than 0.15, compared to 14.20% of medium-sized farms and 5.56% of large farms.

A Guide to Calculating and Interpreting Your Debt-to-Asset Ratio

It’s also important to consider the context of time and how the companies’ debt-to-asset ratios are trending, whether improving or worsening, when drawing conclusions about their financial conditions. Industries with lower debt-to-asset ratios, such as services and wholesalers, tend not to have a lot of assets to leverage. Companies in more volatile sectors such as technology also tend to operate with less debt and lower ratios. The debt ratio is a simple ratio that is easy to compute and comprehend.

The share of medium-sized farms that had a ratio between 0.60 and 0.75 was lower at 1.52%, while 0.33% were greater than 0.75. About 1.37% of large farms had a ratio between 0.60 and 0.75, while 0.53% were greater than 0.75. Calculating your business’s debt to asset ratio requires finding the exact numbers for a lot of blank formula spaces, such as the company’s total liabilities and assets.

Why does the debt-to-total-assets ratio change over time?

For example, a trend of increasing leverage use might indicate that a business is unwilling or unable to pay down its debt, which could signify issues in the future. Debt ratio is a metric that measures a company’s total debt, as a percentage of its total assets. A high debt ratio indicates that a company is highly leveraged, and may have borrowed more money than it can easily pay back.

• The results of this measure are looked at by creditors and investors who want to know how financially stable a company can be.
• While comparing companies, people should use multiple financial metrics to get a proper insight.
• It also increases the probability of receiving a much higher interest rate or being rejected altogether if your organization needs to borrow more money.
• This is particularly evident in sectors such as utilities and telecommunications.
• The business owner or financial manager can gain a lot of insight into the firm’s financial leverage through trend analysis.

It is also important to note that a debt-to-asset ratio approaching 1 (100%) is a very high proportion of debt financing. A higher debt-to-asset ratio may show that the company is taking debts to fulfill its cash requirements and is running low on cash flows. A debt-to-asset ratio speaks a lot about a firm’s capital structure and how a firm is using investors’ money and allocating funds. A higher debt-to-asset ratio would mean that the company is relying more on funds which are from debt sources. Conceptually, the total assets line item depicts the value of all of a company’s resources with positive economic value, but it also represents the sum of a company’s liabilities and equity. If you’re wondering how to calculate your debt-to-asset ratio, it’s actually a lot easier than you may think.

Why Is Debt-To-Total-Assets Ratio Important?

It’s great to compare debt ratios across companies; however, capital intensity and debt needs vary widely across sectors. The financial health of a firm may not be accurately represented by comparing debt ratios across industries. Bear in mind how certain industries may necessitate higher debt ratios due to the initial investment needed. It analyzes a firm’s balance sheet by including long-term and short-term debt and all assets. Although Illinois grain farms’ debt-to-asset ratios have been decreasing over time, it is also important to note that the projection for the years 2023 and 2024 is for lower farm incomes and returns.

This ratio shows the proportion of company assets that are financed by creditors through loans, mortgages, and other forms of debt. The ratio is calculated by simply dividing the total debt by total assets. The resulting fraction is a percentage of the asset that is financed with debt. In the above-noted example, 57.9% of the company’s assets are financed by funded debt. Analysts will want to compare figures period over period (to assess the ratio over time), or against industry peers and/or a benchmark (to measure its relative performance).

How do you improve your debt-to-asset ratio?

For example, company C reports $ 2.2 bn of intangible assets, $ 0.5 bn of PPE, and $ 1.5 bn of goodwill as part of $ 22 bn of assets. If all the lenders decide to call for their debt, the company would be unable to pay off its creditors. Creditors use this financial measure to judge the financial risk of a company. A higher financial risk indicates higher interest rates for the company’s loan. The debt-to-asset ratio can also tell us how our company stacks up compared to others in their industry.

• “Total liabilities really include everything the company will have to repay,” she adds.
• The company must also hire and train employees in an industry with exceptionally high employee turnover, adhere to food safety regulations for its more than 18,253 stores in 2022.
• Our team of reviewers are established professionals with decades of experience in areas of personal finance and hold many advanced degrees and certifications.
• All accounting ratios are designed to provide insight into your company’s financial performance.
• As is the story with most financial ratios, you can take the calculation and compare it over time, against competitors, or against benchmarks to truly extract the most valuable information from the ratio.

Perhaps 53.6% isn’t so bad after all when you consider that the industry average was about 75%. The result is that Starbucks has an easy time borrowing money—creditors trust that it is in a solid financial position and can be expected to pay them back in full. A ratio that is greater than 1 or a debt-to-total-assets ratio of more than 100% means that the company’s liabilities are greater than its assets. A ratio that is less than 1 or a debt-to-total-assets ratio of less than 100% means that the company has greater assets than liabilities.