A high debt-to-assets ratio could mean that your company will have trouble borrowing more money, or that it may borrow money only at a higher interest rate than if the ratio were lower. Highly leveraged companies may be putting themselves at risk of insolvency or bankruptcy depending upon the type of company and industry. 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. Last, businesses in the same industry can be contrasted using their debt ratios.
All of our content is based on objective analysis, and the opinions are our own. Total assets may include both current and non-current assets, or certain assets only depending on the discretion of the analyst. Joshua Rodriguez is a personal finance and investing writer with a passion for his craft.
How Do You Calculate the Debt Ratio?
The debt-to-total-assets ratio is calculated by dividing total liabilities by total assets. In the consumer lending and mortgage business, two common debt ratios used to assess a borrower’s ability to repay a debt to asset ratio loan or mortgage are the gross debt service ratio and the total debt service ratio. It’s great to compare debt ratios across companies; however, capital intensity and debt needs vary widely across sectors.
A ratio below 1 means that a greater portion of a company’s assets is funded by equity. Of all the leverage ratios used by the analyst community to understand the financial position of a company, debt to assets tends to be one of the less common ones. Including preferred stock in total debt will increase the D/E ratio and make a company look riskier. Including preferred stock in the equity portion of the D/E ratio will increase the denominator and lower the ratio.
Understanding Debt-to-Asset Ratio
Anyone comparing the ratios to conclude must also consider that both the companies being compared must take the same thing in the numerator and denominator. Some companies which have high debt-to-asset ratios are Moody’s Corp, Lamb Weston Holdings Inc, Lowe’s Company Inc, Alliance Data System Corp, and many more. Having a healthy debt-to-asset ratio will help attract a large volume of investments. In such a case, firm A may still decide to expand, but firm B will have to rethink its expansion as a large number of its funds will now be diverted to paying its interest rates. In case firm B Banks will not prefer to fund its expansion as the company already has a sufficient amount of debts, and the bank may not recover any further debts.
