After all, we get a pretty good idea of how the ratio works and what to look for when calculating the debt-to-asset ratio. Let’s look at a few companies from unrelated industries to understand how the ratio works to put this into practice. Consider that a company with a high amount of leverage or debt may run into trouble during times of stress, such as the recent market downturn in March 2020. Studying the debt situation for any company needs to be part of your process.

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Creditors, on the other hand, want to see how much debt the company already has because they are concerned with collateral and the ability to be repaid. If the company has already leveraged all of its assets and can barely meet its monthly payments as it is, the lender probably won’t extend any additional credit. Both investors and creditors use this figure to make decisions about the company. The business owner or financial manager has to make sure that they are comparing apples to apples. Companies with high debt-to-asset ratios may be at risk, especially if interest rates are increasing.

How does Total Debt to Asset Ratio affect a company?

The Ascent is a Motley Fool service that rates and reviews essential products for your everyday money matters. 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. A company with a high degree of leverage debt to asset ratio may thus find it more difficult to stay afloat during a recession than one with low leverage. Adam Hayes, Ph.D., CFA, is a financial writer with 15+ years Wall Street experience as a derivatives trader. Besides his extensive derivative trading expertise, Adam is an expert in economics and behavioral finance.

• With all the monthly data neatly together, he adds the long-term debt, bank loans, and wages payable to get a total liability of $43,000.
• It simply means that the company has decided to prioritize raising money by issuing stock to investors instead of taking out loans at a bank.
• The debt-to-total-assets ratio is a very important measure that can indicate financial stability and solvency.
• First, it illustrates the percentage of debt used to carry a company’s assets and how these assets can be used to service loans.

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. Financial data providers calculate it using only long-term and short-term debt (including current portions of long-term debt), excluding liabilities such as accounts payable, negative goodwill, and others. The concept of comparing total assets to total debt also relates to entities that may not be businesses.

Understanding the Total Debt-to-Total Assets Ratio

It simply means that the company has decided to prioritize raising money by issuing stock to investors instead of taking out loans at a bank. While a lower calculation means a company avoids paying as much interest, it also means owners retain less residual profits because shareholders may be entitled to a portion of the company’s earnings. One shortcoming of the total debt-to-total assets ratio is that it does not provide any indication of asset quality since it lumps all tangible and intangible assets together. Total debt-to-total assets is a measure of the company’s assets that are financed by debt rather than equity. 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 result 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).

Highly leveraged companies may be putting themselves at risk of insolvency or bankruptcy depending upon the type of company and industry. If the majority of your assets have been funded by creditors in the form of loans, the company is considered highly leveraged. In turn, if the majority of assets are owned by shareholders, the company is considered less leveraged and more financially stable. Should all of its debts be called immediately by lenders, the company would be unable to pay all its debt, even if the total debt-to-total assets ratio indicates it might be able to. It’s also important to understand the size, industry, and goals of each company to interpret their total debt-to-total assets. Google is no longer a technology start-up; it is an established company with proven revenue models that make it easier to attract investors.