The debt-to-total-assets ratio shows how much of a business is owned by creditors (people it has borrowed money from) compared with how much of the company’s assets are owned by shareholders. It is one of three calculations used to measure debt capacity, along with the debt servicing ratio and the debt-to-equity ratio.
Debt capacity reflects both a company’s ability to service its current debt and its ability to raise cash from new debt, if necessary. Taking on debt might help the company through a market downturn or take advantage of opportunities as they arise.
The debt-to-total assets ratio is primarily used to measure a company’s ability to raise cash from new debt. That evaluation is made by comparing the ratio to other companies in the same industry.
The higher a company’s debt-to-total assets ratio, the more it is said to be leveraged. Highly leveraged companies carry more risk of missing debt payments should their revenues decline, and it is harder to raise new debt to get through a downturn.
More about the debt-to-total-assets ratio
The debt-to-total-assets ratio is calculated by dividing a company’s total debt by its total assets. In the balance sheet below, ABC Co.’s total debt is $200,000 and its total assets are $300,000, so its debt-to-total-assets ratio would be:
$200,000 / $300,000 = 0.67
A debt-to-total assets ratio of0.67 means two-thirds of ABC Co. is owned by creditors and one-third by shareholders. This is high compared with other companies in the same industry. It suggests ABC Co. would have trouble incurring additional debt.
The debt ratio, or total debt-to-total assets, is calculated by dividing a company's total debt by its total assets. It is also called the debt-to-assets ratio. It is a leverage ratio that defines how much debt a company carries compared to the value of the assets it owns.
can be calculated by dividing total debt by total assets. A debt ratio of greater than 1.0 or 100% means a company has more debt than assets while a debt ratio of less than 100% indicates that a company has more assets than debt.
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.
Debt ratios must be compared within industries to determine whether a company has a good or bad one. Generally, a mix of equity and debt is good for a company, though too much debt can be a strain. Typically, a debt ratio of 0.4 (40%) or below would be considered better than a debt ratio of 0.6 (60%) or higher.
This ratio is often used by investors and creditors to determine if a company can pay off its debts on time and be profitable in the long run. There's no ideal figure, but a ratio of less than 0.5 is generally preferred.
What counts as a good debt ratio will depend on the nature of the business and its industry. 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.
The debt-to-total-assets ratio shows how much of a business is owned by creditors (people it has borrowed money from) compared with how much of the company's assets are owned by shareholders.
Your debt-to-income ratio (DTI) compares how much you owe each month to how much you earn. Specifically, it's the percentage of your gross monthly income (before taxes) that goes towards payments for rent, mortgage, credit cards, or other debt.
Debt to Value Ratio means, as of any date of determination, the ratio of Total Indebtedness of the Borrower and the Subsidiaries to the Total Assets of the Borrower and the Subsidiaries.
If your debt ratio does not exceed 30%, the banks will find it excellent. Your ratio shows that if you manage your daily expenses well, you should be able to pay off your debts without worry or penalty. A debt ratio between 30% and 36% is also considered good.
A higher total assets to debt ratio represents more security to the lenders of long-term loans. However, lower total assets to debt ratio represent less security to the lenders of long-term loans, which indicates more dependence of the firm on long-term borrowed funds.
To bring your Debt to Assets Ratio into range, assets have to increase or debt has to decrease. Increasing assets will often require a loan (more debt), new investors, or more importantly, retained earnings. New investors come with strings attached, but can often provide immediate improvement in Debt to Assets.
Ideally, financial experts like to see a DTI of no more than 15 to 20 percent of your net income. For example, a family with a $250 car payment and $100 of monthly credit card payments, and $2,500 net income per month would have a DTI of 14 percent ($350/$2,500 = 0.14 or 14%).
An ROA of 5% or better is typically considered good, while 20% or better is considered great. In general, the higher the ROA, the more efficient the company is at generating profits.
Signal: Under .5 or 50% is better; over 1.0 or 100% would indicate that liabilities exceed assets, which is not desirable; upward trend may be cause for concern. Calculation: Total liabilities may also be divided by total income or total capital for a different emphasis.
In the retail sector, an asset turnover ratio of 2.5 or more could be considered good, while a company in the utilities sector is more likely to aim for an asset turnover ratio that's between 0.25 and 0.5.
What is a good debt-to-equity ratio? Although it varies from industry to industry, a debt-to-equity ratio of around 2 or 2.5 is generally considered good. This ratio tells us that for every dollar invested in the company, about 66 cents come from debt, while the other 33 cents come from the company's equity.
Introduction: My name is Stevie Stamm, I am a colorful, sparkling, splendid, vast, open, hilarious, tender person who loves writing and wants to share my knowledge and understanding with you.
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