Trying to understand if your business has a healthy amount of debt? The debt to total assets ratio is a key financial KPI that can provide you with the answer.
Whether you’re a growing startup or a more established business, this leverage ratio can help you work out your capacity to meet debt obligations.
It gives you an idea of whether your business is over leveraged or has the opportunity to take on more debt.
In this KPI glossary entry, we’ll tell you why this KPI is important, outline the debt to total assets ratio formula and what a good debt to asset ratio looks like.
We’ll also show you how to calculate debt to total assets with a step-by-step example.
The debt to total assets ratio allows you to work out the proportion of your business’s assets that are financed by debt, rather than equity.
In terms of what we mean by debt, this can include such things as loans, lines of credit, overdraft services and mortgages.
Essentially, debt to total assets analysis gives you an idea of how much debt your business has compared to the value of its assets.
The ratio is an important part of financial KPI tracking as it allows you to gauge your business’s degree of financial leverage, and in turn, how financially stable it is.
It allows you to see if your business can meet its debt obligations on time – essentially, it’s a barometer of the likelihood of your business defaulting on its payments.
Debt to total assets analysis is not only useful for business owners, but also creditors and investors that need to assess risk prior to investment.
While the ratio provides a good barometer of your business’s level of debt, it also comes with limitations, which we’ll discuss later in this article.
The debt to total assets ratio formula involves dividing your business’s total debt by its total assets.
The debt to assets ratio formula is:
Total Debt to Total Assets Ratio = Total Debt / Total Assets
A little later, we’ll show you how to calculate the total debt to total assets ratio. But first, let’s breakdown the figures that this formula must include:
In terms of your total debt, this includes both short-term debt and long-term debt.
Short-term debt is debt that isn’t due to be paid within 12 months and can include the likes of bank loans, lines of credit or overdrafts .
Long-term debt is debt that is due to be paid more than 12 months in the future or beyond your business’s operating cycle – for example, a mortgage.
With respect to your total assets, this includes both tangible assets, like your business’s equipment or inventory, and intangible assets, which can include non-physical assets like patents, trademarks or intellectual property.
When you calculate debt to total assets, the lower the ratio, the less leveraged your business is.
This means that your business has less risk of not meeting its debt obligations. Meanwhile, the higher your ratio, the more the inverse is true.
So, what does a good debt to asset ratio look like?
This is a difficult question to answer as what is considered a good ratio in one sector may not be the case in another.
Other factors – like whether your business is a startup, scale up or more established – can also influence what is considered good.
Keeping these considerations in mind, below we explore what the following values mean in general:
If your business has a ratio of 1, this means that the value of its assets are exactly equal to that of its debt on your balance sheet.
A ratio of one indicates that your business has a high level of debt, and theoretically, if you needed to pay it off all at once, you would need to sell all your assets.
This means your business is at a high risk of defaulting on its obligations.
If you have a ratio over 1, this could be a warning of financial difficulties ahead as your business’s debt is greater than its assets.
This means that if you sold all of your assets, you would still not be able to pay all your debt obligations.
Your business therefore has very little wiggle room or buffer to prevent defaulting on debt payments, which could easily happen if it were to, for instance, experience a decline in sales.
If your business has a ratio less than 1, the value of your total assets is greater than that of your debt.
This means that your business has a healthy amount of debt and is therefore at a lower risk of defaulting on its obligations.
A ratio that is too low, however, could signal that your business is not leveraging debt sufficiently to, for instance, fund initiatives that could help spur growth.
Now that you’re across what this ratio tells you and the formula, let’s go through a step-by-step example of how to calculate the debt to total assets ratio.
First off, you’ll need to look at your business’s balance sheet to find the value of its total assets.
Remember, the total assets figure can include tangible assets like property, plant and equipment, as well as intangible assets like intellectual property or goodwill.
For this example, let’s assume your total assets amount to $225,000.
Next, take a look at your balance sheet again to see your business’s total debt figure, which should include both short-term and long-term debt obligations.
We’ll assume for this example that your total debt equals $311,000.
Finally, you’ll need to use debt to total assets ratio formula, which involves dividing your business’s total debt by its total assets.
The formula is:
Total Debt to Total Assets Ratio = Total Debt / Total Assets
Total Debt to Total Assets Ratio = $225,000 / $311,000 = 0.72
This means that your business’s debt to total assets ratio is 0.72, which generally speaking indicates a healthy amount of debt.
You can also express this value as a percentage by multiplying it by 100, so it would then equal 72%.
There are certain things to keep in mind when performing debt to total assets analysis, however. Let’s take a look at the main caveats:
Like many financial KPIs, what is considered a good ratio in one sector may not be the case in others.
The total debts to total assets ratio will therefore only provide a meaningful comparison when you compare your business to others in the same sector.
For example, a business in the utilities sector may have a higher acceptable ratio as it needs to purchase a significant amount of tangible assets, like property, plant and equipment, with debt.
On the other hand, a food services business would have a lower acceptable ratio given its need to purchase tangible assets is not as significant.
Because debt to total assets analysis doesn’t make a distinction between different assets, it could give you a misleading picture of your business’s financial structure.
For instance, the ratio takes both intangible and tangible assets into account equally, and some assets may have higher perceived value than is actually the case.
Another limitation is that the ratio doesn’t factor in when your business’s debts will mature, making no distinction between short-term and long-term debt.
The debt to total assets ratio is limited in scope, providing a snapshot of a single moment in time and focusing only on debt relative to assets.
It doesn’t factor in your business’s ability to pay interest payments on debt instruments, which is something you can see with the interest coverage ratio .
The ratio also doesn’t tell you anything about your business’s cash flow, productivity, efficiency or profitability. To get insight into these, you’ll need to calculate a range of other KPIs.
For instance, you can gauge your business’s operational efficiency with activity ratios , which can tell you how efficiently it utilises assets and resources.
You can also use the gross margin return on inventory metric to see how well your business produces profit from its inventory.
You can read our comprehensive guide on profitability analysis to see which KPIs you should be tracking and the insights they can give you.
Calculating key financial metrics at regular intervals can be a time-consuming and error prone process – but it’s one that can be automated with the help of financial reporting software.
Our platform Fathom, for instance, helps make KPI tracking a seamless part of your daily workflows.
It offers over 50 in-built KPIs – including the debt to total assets ratio – so you can track your business’s performance on an ongoing, regular basis.
These include KPIs for growth, efficiency, profitability, cash flow, liquidity, gearing and asset usage. Plus, you can build your own metrics with the intuitive KPI builder.
Insights are easy to grasp with highly visual dashboards and reports, with the ability to create a range of customisable financial trend statements.
Whether you’re a small growing business or enterprise, Fathom also offers all the capabilities you need to forecast cash flow, generate management reports and perform consolidations, all in one platform.
See for yourself how it can automate financial management and insights with our no-obligation, credit card-free 14 day free trial.
It is a financial KPI that enables you to understand the percentage of your business’s assets that are financed by debt.
Debt to total assets analysis helps you see if your business has a healthy amount of debt and allows you to gauge the risk of defaulting on payments.
The debt to assets ratio formula, which involves dividing your business’s total debt by its total assets, is:
Total Debt to Total Assets Ratio = Total Debt / Total Assets
To calculate debt to total assets, you’ll need to look at your balance sheet to find the value of your total assets and total debt.
With respect to your total assets, this includes both tangible and intangible assets, while your total debt includes both short-term and long-term debt.
Let’s look at an example to show you how the calculation works. Let’s say your business’s total assets equals $400,000 and its total debt amounts to $250,000. Using the formula, you would therefore calculate:
Total Debt to Total Assets Ratio = Total Debt / Total Assets
Total Debt to Total Assets Ratio = $250,000 / $400,000 = 0.63
This means that your ratio is 0.63, which generally speaking indicates a healthy level of debt.
Kit is the Content Marketing Manager for The Access Group APAC and Fathom. He is a former journalist with extensive experience in content writing and copywriting across various industries, including higher education, not-for-profit, and finance sectors.
