What is the Debt to Assets Ratio?
The debt to assets ratio is a solvency ratio. Similar to the assets to equity ratio and the debt to equity ratio, the debt to assets ratio gives an idea about the capital structure of a firm, highlighting whether it finances its assets primarily with debt or equity.
How to Calculate the Debt to Assets Ratio
The debt to assets ratio is calculated by dividing total liabilities by total assets. Both are reported on a company’s balance sheet.
How to Interpret the Debt to Assets Ratio
A higher debt to assets ratio means that a company finances its assets more with debt than with equity, which in turn is associated with higher risk and potential solvency issues. If debt levels become excessive, a company might not be able to make the interest payments and might face bankruptcy.
The following scenarios can be considered:
- No debt: A debt to assets ratio of 0 means that a company has no debt, and is 100% financed with equity.
- Moderate debt: A ratio of 0.5 means that the assets are 50% financed with debt, and 50% with equity.
- High debt: A ratio of 0.8 means that the assets are 80% financed with debt, and only 20% with equity.
- Extremely high debt: A ratio of 0.99 represents the extreme risk scenario where a company has 99% of its assets financed with debt, and 1% with equity.
