Vareto Finance Glossary
Total Debt-to-Asset Ratio
Definition
Total debt-to-assets ratio is a financial indicator that shows how much of a company's ownership is in the hands of its creditors versus how much ownership is with its shareholders. It is one of three important ratios used to measure a company's debt capability.This ratio gives insight into a company’s capacity to repay its current debt and its capability to raise funds from fresh debt if needed. With additional debt, a company may be better off in dealing with a market downturn or it can be financially capable of grabbing new opportunities as they arise.
Example
The debt-to-total-assets ratio is calculated as total debt/total assets. If a company's total debt is $200,000 and total assets are $300,000, Debt to assets ratio = $200,000 / $300,000 = 0.67A ratio of 0.67 means more than half of the company's ownership is with creditors and only one-third of ownership is with shareholders. A high debt-to-assets ratio compared to peers in the same industry would mean that the company may have trouble raising additional debt.
Why it matters
A company's debt-to-assets ratio can give insight into its capital structure and leverage standing.The higher a company’s debt-to-total assets ratio, the more leveraged it is. Companies that have high leverage levels often carry a higher risk of inability to make debt repayments in case of a drop in revenues. It is also harder for such companies to raise fresh debt to deal with any downturn.
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