Investopedia: Total Debt to Total Assets

Total Debt to Total Assets


Total debt to total assets, also called the total-debt ratio, is an accounting measurement that shows how much of a company’s assets are funded by borrowing.

Total Debt to total assets is calculated by taking a company’s total debt and dividing by its total assets.

For example, say Company A has $100 million of total assets, and $40 million of total debt. Dividing total debt by total assets, we find its debt ratio is 40%.

This means 40% of Company A's assets are funded from borrowing.

Total debt to total assets is often used by management, analysts and investors to determine the solvency of a company, or in other words, the ability of the company to meet long-term obligations.

The higher the debt ratio, the more financial leverage the company operates with. Higher debt means more money is paid to creditors to keep the company working. This can also mean higher financial risk, since debt payments must be paid even if sales decline. A company with a considerably higher total debt to total assets ratio than its peers will probably have greater risk in a recession than a company with lower debt.

Higher debt can also mean less flexibility to obtain future financing, since it may be harder to raise additional money if a company already has a lot of debt.

Debt ratios vary by industry. Therefore, a company’s debt ratio is most useful when compared to other companies in the same industry, or to an industry benchmark.
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