What Is Debt-to-Equity Ratio? Definition and Guide 2023

For this formula, you need to know the company’s total amount of debt, short-term and long-term, as well as total assets. A debt is considered short-term if it is expected to be repaid within one year. Total Assets to Debt Ratio is the ratio, through which the total assets of a company are expressed in relation to its long-term debts. It is a variation of the debt-equity ratio and gives the same indication as the debt-equity ratio.

As is often the case, comparisons of the debt ratio among different companies are meaningful only if the companies are similar, e.g. of the same industry, with a similar revenue model, etc. The result means that Apple had $1.80 of debt for every dollar of equity. But on its own, the ratio doesn’t give investors the complete picture. It’s important to compare the ratio with that of other similar companies. A total-debt-to-total-asset ratio greater than one means that if the company were to cease operating, not all debtors would receive payment on their holdings. The debt-to-asset ratio indicates that the company is funding 31% of its assets with debt.

Understanding the Total-Debt-to-Total-Assets Ratio

However, if the additional cost of debt financing outweighs the additional income that it generates, then the share price may drop. The cost of debt and a company’s ability to service it can vary with market conditions. As a result, borrowing that seemed prudent at first can prove unprofitable later under different circumstances. The total-debt-to-total-assets ratio compares the total amount of liabilities of a company to all of its assets. The ratio is used to measure how leveraged the company is, as higher ratios indicate more debt is used as opposed to equity capital. To gain the best insight into the total-debt-to-total-assets ratio, it’s often best to compare the findings of a single company over time or compare the ratios of different companies.

• It helps you see how much of your company assets were financed using debt financing.
• Real estate companies typically have a very high debt to asset ratio, but this doesn’t necessarily mean that it’s a bad business.
• This may be advantageous for creditors because they are likely to get their money back if the company defaults on loans.
• This is also true for an individual applying for a small business loan or a line of credit.
• Experts measure the long-term debt to asset ratio a little differently.
• For example, often only the liabilities accounts that are actually labelled as “debt” on the balance sheet are used in the numerator, instead of the broader category of “total liabilities”.

A low total-debt-to-total-asset ratio isn’t necessarily good or bad. 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 law firm bookkeeping shareholders may be entitled to a portion of the company’s earnings. 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 is easier to attract investors.

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This means that 31% of XYZ Company’s assets are being funded by debt. One drawback with the use of debt ratio is that it bundles all the different types of assets into one basket. There is no mechanism to distinguish the quality of the assets acquired by leverage. The 1.5 multiple in the ratio indicates a very high amount of leverage, so ABC has placed itself in a risky position where it must repay the debt by utilizing a small asset base.

D/E is used by lenders when determining potential loans, as well as investors to understand how well the business is performing. The debt ratio is valuable for evaluating a company’s financial structure and risk profile. Broadly speaking, ratios of 60% (0.6) or more are considered high, while ratios of 40% (0.4) or less are considered low.