Debt-to-assets ratio

Definition

The debt-to-assets ratio is a solvency ratio that measures the proportion of a company's assets that are financed by debt. It provides insight into the financial leverage and stability of an organization.

5 Must Know Facts For Your Next Test

1. The formula for calculating the debt-to-assets ratio is Total Debt divided by Total Assets.
2. A higher debt-to-assets ratio indicates greater financial risk as more assets are financed through debt.
3. A lower ratio suggests a more stable financial position with less reliance on borrowed funds.
4. This ratio helps investors and creditors assess a company's long-term solvency and ability to meet its obligations.
5. Industry standards for acceptable debt-to-assets ratios vary, so it’s important to compare this ratio to industry benchmarks.

Review Questions

• How do you calculate the debt-to-assets ratio?
• What does a high debt-to-assets ratio indicate about a company’s financial risk?
• Why is it important to compare the debt-to-assets ratio to industry benchmarks?

Related terms

Debt Ratio: Measures the proportion of total liabilities relative to total assets.

Equity Ratio: Indicates the proportion of total equity relative to total assets.

Solvency Ratio: Assesses a company's ability to meet its long-term liabilities and financial commitments.