DEBT TO TOTAL ASSET RATIO

PRESENTED BY :
MAICA JANE ARADA
 DEBT TO TOTAL ASSET RATIO
• Also known as the Debt Ratio.
• Is an indicator of a company's financial
leverage.
• It indicates the percentage of assets that are
being financed with debt.
• Commonly used by analysts, investors and
creditor.
 INTERPRETATION OF DEBT TO
TOTAL ASSET RATIO

• A RATIO EQUAL TO ONE (=1)

• A RATIO GREATER THAT ONE (>1)
• A RATIO OF LESS THAN ONE (<1)
 FORMULA
Debt to Total Asset Ratio= Total Liabilities
Total Assets
 Example 1
• Christopher owns a bakery in midtown
Manhattan called Lucky Charms. He’s
recently been worried about the finances of
the organization as he prepares to apply for
a loan extension. He decides to conduct a
debt to asset ratio test to determine the
percentage of his expenses accounted for by
financing.
• To begin the process, Christopher gathers the
Lucky Charm’s balance sheet for November 2020
to ensure that he has all the information he
needs at his disposal.
With all the monthly data neatly together, he
adds the long-term debt, bank loans, and wages
payable to get a total liability of $43,000. He
writes this number at the top of the asset to debt
ratio equation.Christopher proceeds to find
Lucky Charms’ total assets. He adds the accounts
receivable, inventory, and relevant investments.
After calculations, his company’s total assets
were $31,200. He writes this on the bottom half
of the division equation.
 SOLUTION
Debt to Total Asset Ratio
=43,000 / 31,200
= 1.37

1.37 : 1
 EXAMPLE 2
• Leslie owns a small business creating and selling
handmade jewelry pieces. She wants to calculate
her debt to asset ratio to gauge her company’s
financial health. She starts by adding together all
her business’ liabilities. She adds together the
company’s accounts payable, interest payable,
and principle loan payments to arrive at
$10,500 in total liabilities and debts. Next, Leslie
adds together all the assets of her business. She
adds together the value of her inventory, cash,
accounts receivable, and the result is $26,000.
 SOLUTION
Debt to Total Asset Ratio
= 10,500 / 26,000
= 0.403 or 40.3%

0.403 : 1
 EXAMPLE 3
• An investor named Sandra wishes to know if a
utility company she interested in is a good
candidate to put her money on. Sandra decided
to use the debt ratio of the company from last
year’s results as one of the bases of her decision.
She can determine the company’s total assets to
be $13,000,000 after looking at the company’s
balance sheet she obtained. She also found out
that the company the combined amount of
short-term debts and long-term debts of
$3,900,000. Can we calculate the company’s
debt ratio based on this data?
 SOLUTION
Debt to Total Asset Ratio
= 4,900,000 / 13,000,000
= 0.3769 or 37.69%
• 0.4 OR 40% - is considered a good debt
ratio
• 0.6 OR 60% - is considered to be a poor
ratio.
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