Debt-To-Total-Assets Ratio Definition, Calculation, Example

A ratio greater than 1 shows that a considerable portion of the debt is funded by assets. A high ratio also indicates that a company may be putting itself at risk of defaulting debt to asset ratio on its loans if interest rates were to rise suddenly. A ratio below 1 translates to the fact that a greater portion of a company’s assets is funded by equity.

Terms Similar to the Debt to Assets Ratio

Apple has a debt to asset ratio of 31.43, compared to an 11.47% for Microsoft, and a 2.57% for Tesla. All three of these ratios would generally be seen as low, leaving all three companies with ample room to increase their leverage in the future if they wish to do so. Tesla’s ratio is particularly striking, especially considering that they have decreased their debts substantially in recent years. A ratio of less than one means that a company has more current assets than current liabilities. A ratio of one means that a company has equivalent debts and assets.

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• What counts as a good debt ratio will depend on the nature of the business and its industry.
• Calculating your business’s debt-to-asset ratio can provide interested parties with the numbers they need to make a decision on investing in or loaning funds to your company.
• For example, assume from the example above that Disney took on $50.8 billion of long-term debt to acquire a competitor and booked $20 billion as a goodwill intangible asset for this acquisition.
• The evaluation of such ratios depends on the specific industry in which the company operates.
• Additionally, younger people tend to have lower credit scores as they haven’t had the time to build credit like older consumers.
• The ratio is used to measure how leveraged the company is, as higher ratios indicate more debt is used as opposed to equity capital.

In this case, the company is not as financially stable and will have difficulty repaying creditors if it cannot generate enough income from its assets. For borrowers with credit card debt and other relatively small debts with high interest rates, consolidating debt could make them more manageable. Debt consolidation is a process where you take out one large loan to pay off all your smaller loans, effectively condensing them into one larger total. You can also consolidate credit card debt with a balance transfer card. Large amounts of debt can also lower your credit score by raising your credit utilization ratio or simply by causing you to miss a payment here and there, resulting in a delinquency on your credit report. As of the fourth quarter of 2023, the delinquency rate on credit card loans is at 3.10%, which is the highest it’s been since 2012.

Additional Resources

• Generally speaking, a debt-to-equity or debt-to-assets ratio below 1.0 would be seen as relatively safe, whereas ratios of 2.0 or higher would be considered risky.
• Investors and accountants use debt ratios to assess the risk that a company is likely to default on its obligations.
• Trend analysis is looking at the data from the firm’s balance sheet for several time periods and determining if the debt-to-asset ratio is increasing, decreasing, or staying the same.
• This indicates 40% of the corporation’s assets are being financed by the creditors, and the owners are providing 60% of the assets’ cost.
• It is important to examine the industry average and then determine what constitutes a favorable debt-to-asset ratio.
• A company with a DTA of less than 1 shows that it has more assets than liabilities and could pay off its obligations by selling its assets if it needed to.
• We can observe this among consumers with poor credit, who have relatively low debts likely because many traditional loans and credit cards are not accessible to them.

Student loans are the next largest type of debt among those listed in the data, followed closely by auto loans. The valuation modeling course by WSO will further enhance your ability to understand and map ratios and use them to plot trend lines and gain insights into different ratios. Hence some highly capital-intensive companies, like the petroleum industry, find it difficult to raise funds. Because of such widespread https://www.bookstime.com/ practices, each will result in a different debt-to-asset ratio; hence, a comparison of debt-to-asset ratio may not be accurate. Although both financial metrics measure a company’s leverage, they indicate different scenarios. In such a case, firm A may still decide to expand, but firm B will have to rethink its expansion as a large number of its funds will now be diverted to paying its interest rates.

Leverage Trends

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An increasing trend indicates that a business is unwilling or unable to pay down its debt, which could indicate a default at some point in the future and possible bankruptcy. The second comparative data analysis you should perform is industry analysis. In order to perform industry analysis, you look at the debt-to-asset ratio for other firms in your industry. If your debt-to-asset ratio is not similar, you try to determine why. If, for instance, your company has a debt-to-asset ratio of 0.55, it means some form of debt has supplied 55% of every dollar of your company’s assets.

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