This tells you that 40.7% of your firm is financed by debt financing and 59.3% of your firm’s assets are financed by your investors or by equity financing. In the banking and financial services sector, a relatively high D/E ratio is commonplace. Banks carry higher amounts of debt because they own substantial fixed assets in the form of branch networks.

This will determine whether additional loans will be extended to the firm. If the calculation yields a result greater than 1, this means the company is technically insolvent as it has more liabilities than all of its assets combined. A calculation of 0.5 (or 50%) means that 50% of the company’s assets are financed using debt (with the other half being financed through equity). A company with a high degree of leverage may thus find it more difficult to stay afloat during a recession than one with low leverage.

Financial ratios are created with the use of numerical values taken from financial statements to gain meaningful information about a company. As such, it defines what percentage of the company’s assets are funded by debt, as opposed to equity. Here, “Total Debt” includes both short-term and long-term debts, while “Total Assets” includes everything from tangible assets such as machinery, to patents and other intangible assets. The debt to total assets ratio describes how much of a company’s assets are financed through debt.

- Of all the leverage ratios used by the analyst community to understand the financial position of a company, debt to assets tends to be one of the less common ones.
- It also puts your company at a higher risk for defaulting on those loans should your cash flow drop.
- Lenders use the D/E figure to assess a loan applicant’s ability to continue making loan payments in the event of a temporary loss of income.
- Ask a question about your financial situation providing as much detail as possible.
- Learn financial statement modeling, DCF, M&A, LBO, Comps and Excel shortcuts.

At the same time, leverage is an important tool that companies use to grow, and many businesses find sustainable uses for debt. A debt ratio of 30% may be too high for an industry with volatile cash flows, in which most businesses take on little debt. A company with a high debt ratio relative to its peers would probably find it expensive to borrow and could find itself in a crunch if circumstances change. Conversely, a debt level of 40% may be easily manageable for a company in a sector such as utilities, where cash flows are stable and higher debt ratios are the norm.

## What is the debt-to-total-assets ratio used for?

A high debt ratio indicates that a company is highly leveraged, and may have borrowed more money than it can easily pay back. Investors and accountants use debt ratios to assess the bookstime risk that a company is likely to default on its obligations. The Total Debt to Asset Ratio is calculated by taking the total debt of a company and dividing it by the total assets.

You can’t have some firms using total debt and other firms using just long-term debt or your data will be corrupted and you will get no helpful data. 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. If the debt has financed 55% of your firm’s operations, then equity has financed the remaining 45%. Gearing ratios focus more heavily on the concept of leverage than other ratios used in accounting or investment analysis.

- The debt ratio is defined as the ratio of total debt to total assets, expressed as a decimal or percentage.
- It allows the user to better focus on the stocks that are the best fit for his or her personal trading style.
- In simple terms, it shows the extent to which the long-term loans of a company are covered by its total assets.
- A debt-to-equity ratio of 1.5 would indicate that the company in question has $1.50 of debt for every $1 of equity.

Lenders often have debt ratio limits and do not extend further credit to firms that are overleveraged. Of course, there are other factors as well, such as creditworthiness, payment history, and professional relationships. The fundamental accounting equation states that at all times, a company’s assets must equal the sum of its liabilities and equity. A ratio of less than one means that a company has more current assets than current liabilities. A ratio of greater than one means that a company owes more in debt than they possess in assets.

Zacks Rank stock-rating system returns are computed monthly based on the beginning of the month and end of the month Zacks Rank stock prices plus any dividends received during that particular month. A simple, equally-weighted average return of all Zacks Rank stocks is calculated to determine the monthly return. Only Zacks Rank stocks included in Zacks hypothetical portfolios at the beginning of each month are included in the return calculations. Certain Zacks Rank stocks for which no month-end price was available, pricing information was not collected, or for certain other reasons have been excluded from these return calculations. The company’s quarterly Total Long Term Debt is the company’s current quarter’s sum of; all long term debts, loans, leasing and financial obligations lasting over one year. On the other hand, the typically steady preferred dividend, par value, and liquidation rights make preferred shares look more like debt.

## What is a good debt-to-equity (D/E) ratio?

In contrast, if a business has a low long-term debt-to-assets ratio, it can signify the relative strength of the business. A year-over-year decrease in a company’s long-term debt-to-total-assets ratio may suggest that it is becoming progressively less dependent on debt to grow its business. Although a ratio result that is considered indicative of a “healthy” company varies by industry, generally speaking, a ratio result of less than 0.5 is considered good.

Similarly, a decrease in total liabilities leads to a lower debt-to-total asset ratio. On the other hand, a change in total assets will lead to a change in the debt-to-total asset ratio in the opposite direction, either positive or negative. The debt-to-total-assets ratio is a popular measure that looks at how much a company owes in relation to its assets. The results of this measure are looked at by creditors and investors who want to know how financially stable a company can be. If a company has a negative debt ratio, this would mean that the company has negative shareholder equity. In most cases, this is considered a very risky sign, indicating that the company may be at risk of bankruptcy.

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). Short-term debt also increases a company’s leverage, of course, but because these liabilities must be paid in a year or less, they aren’t as risky. If both companies have $1.5 million in shareholder equity, then they both have a D/E ratio of 1. On the surface, the risk from leverage is identical, but in reality, the second company is riskier.

In general, a ratio around 0.3 to 0.6 is where many investors will feel comfortable, though a company’s specific situation may yield different results. If the firm raises money through debt financing, the investors who hold the stock of the firm maintain their control without increasing their investment. Investors’ returns are magnified when the firm earns more on the investments it makes with borrowed money than it pays in interest. Including preferred stock in total debt will increase the D/E ratio and make a company look riskier. Including preferred stock in the equity portion of the D/E ratio will increase the denominator and lower the ratio. This is a particularly thorny issue in analyzing industries notably reliant on preferred stock financing, such as real estate investment trusts (REITs).

## Real-World Example of the Total-Debt-to-Total-Assets Ratio

Some sources consider the debt ratio to be total liabilities divided by total assets. This reflects a certain ambiguity between the terms debt and liabilities that depends on the circumstance. The debt-to-equity ratio, for example, is closely related to and more common than the debt ratio, instead, using total liabilities as the numerator.

## (Delayed Data from NSDQ)

Debt ratio is a financial ratio that indicates the percentage of a company’s assets that are provided via debt. It is the ratio of total debt (short-term and long-term liabilities) and total assets (the sum of current assets, fixed assets, and other assets such as ‘goodwill’). The debt-to-total-assets ratio is a very important measure that can indicate financial stability and solvency. This ratio shows the proportion of company assets that are financed by creditors through loans, mortgages, and other forms of debt. What counts as a good debt ratio will depend on the nature of the business and its industry.

With this information, investors can leverage historical data to make more informed investment decisions on where they think the company’s financial health may go. A debt ratio greater than 1.0 (100%) tells you that a company has more debt than assets. Meanwhile, a debt ratio of less than 100% indicates that a company has more assets than debt. Used in conjunction with other measures of financial health, the debt ratio can help investors determine a company’s risk level. Investors use the ratio to evaluate whether the company has enough funds to meet its current debt obligations and to assess whether the company can pay a return on its investment. Creditors use the ratio to see how much debt the company already has and whether the company can repay its existing debt.

## Why the Debt-to-Asset Ratio Is Important for Business

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If you do choose to calculate your debt-to-asset ratio, do so on a regular basis so you can track any increases or decreases in your number and act accordingly. On the opposite end, Company C seems to be the riskiest, as the carrying value of its debt is double the value of its assets. A financial professional will offer guidance based on the information provided and offer a no-obligation call to better understand your situation. Ask a question about your financial situation providing as much detail as possible. We follow strict ethical journalism practices, which includes presenting unbiased information and citing reliable, attributed resources. The articles and research support materials available on this site are educational and are not intended to be investment or tax advice.