Calculate and Interpret the Debt-to-Assets Ratio

By Stock Research Pro • September 5th, 2009

The debt-to-assets ratio or “total debt to total assets” ratio is used to measure the overall financial health of a company by determining the level to which the company has financed its assets through debt. In general, the higher the debt-to-assets ratio, the greater the risk the company will run into financial issues. A high ratio can also mean that the company has limited financial flexibility as its capacity for borrowing may be restricted. A company that carries too much debt could receive lower bond ratings which translate to higher interest rates for any additional debt they need to take on. Companies that find themselves in this situation often lose out on opportunities for expansion.

Definition of an Asset

For companies, assets are the resources they own (tangible or intangible) that are applicable to the payment debt and/or readily converted to cash (although cash itself is recorded as an asset).

Calculate the Debt-to-Assets Ratio

The formula for the debt-to-assets ratio can be written as:

Debt-to-Assets = Total Debts / Total Assets

A ratio of less than 1 shows that a majority of company assets are financed through equity. Greater than 1 would mean they are financed more through debt. Many investors view a debt-to-assets of 65% indicative of excessive debt. Investors should consider the industry in which the company operates and some industries require higher debt-to-assets ratios than others. Like many ratios, the debt-to-assets measure may be best used when comparing companies within the same industry or when evaluating a company’s performance over time.

How a Company Can Improve its Debt-to-Assets Ratio

In an effort to improve is debt-to-assets ratio, a company might issue additional stock, perform a debt-equity swap or consider selling some of its assets to pay off a portion of the debt.


The above information is educational and should not be interpreted as financial advice. For advice that is specific to your circumstances, you should consult a financial or tax advisor.

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