Debt to Asset Ratio Calculator

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Analyze the financial stability of any company with Calcopolis.

Debt to Asset Ratio is one of the most important markers when assessing a company's leverage and risk factors, which gives us a clearer image of its financial stability.

Simply put, the debt to asset ratio measures the total amount of a company’s debt and liabilities compared to its equity.

If you want to measure this metric while skipping the math, you should use the Calcopolis Debt to Asset Ratio Calculator.

What Is the Debt to Asset Ratio?

The debt to asset ratio is the solvency ratio used to determine the proportion of the assets funded by creditors and debt rather than by equity and shareholders.

Creditors often use the ratio to evaluate the company’s financial leverage and the ability to raise more cash by borrowing money, but it can also be used to compare the flexibility of various companies within the same sector.

The lower the debt to asset ratio, the more flexible and financially stable a company will be, as it can borrow more money without being encumbered or keeping the company at a high risk of defaulting.

How to Calculate Debt to Asset Ratio

Calcopolis Debt to Asset Ratio Calculator can save you all the hassle and brainwork to figure out the ratio, but here’s a deeper look at the mathematical formula used and how to apply it:

The Debt to Asset Ratio Formula

Total Debt to Asset Ratio = (Short Term Debt + Long Term Debt) / Total Assets

Where:

• Short Term Debt represents any debts that are maturing within one year
• Long Term Debt represents the rest of borrowings and debts found on the company’s balance sheet

The result is usually represented in the form of a number or a fraction. However, if you want to turn it into a percentage, you multiply it by 100

Example

Let’s say that we have the balance sheets of two companies.

Company A’s balance sheet recorded \$78,000,000 in total debt and \$126,000,000 in total assets, while Company B’s balance sheet recorded \$46,000,000 in total debt and \$93,000,000 in total assets.

In that case, the debt to asset ratio of Company A is \$78,000,000 / \$126,000,000 = 0.62 (62%), while Company B has a debt to asset ratio of \$46,000,000 / \$93,000,000 = 0.49 (49%)

In that example, Company B has more financial flexibility and stability than company A despite having lower assets because its debt to asset ratio is lower, which makes it a safer choice to loan from a bank or an investor.

On the other, the majority of assets that company A owns are financed (62%) and owed to creditors.

The Importance of This Metric

Keeping track of the debt to asset ratio allows you to gauge a specific company's financial flexibility level.

Why? Simply because it can help you understand the extent of control creditors and debtors have over the operations of the company.

For that reason, some analysts regard the debt to asset ratio as the ratio between the assets owned by the creditors versus the assets that the shareholders actually own.

The ratio reflects the company’s ability to raise more liquidity and cash flow from debts because bankers and financial analysts often use it to assess the risk value of lending certain business cash.

Additionally, the debt to asset ratio can be used to directly compare the leveraging status of competitor companies within the same industry, as explained by the example above.

How to Improve Debt to Asset Ratio

Having a better debt to asset ratio is a great way to become more eligible for financial loans with lower risk. If you want to improve your debt to asset ratio, here are some tips that you should consider:

Restructure your debts through refinancing in order to reduce the high-interest rate of your current loans.

Apply tactics to improve sales to increase the total value of assets, which lowers the overall debt to asset ratio.

Improve your inventory management system to speed up your inventory turnover. This speeds up the cash flow and increases equity, which boosts your assets’ value.

Authors

Created by Lucas Krysiak on 2023-02-15 17:14:56 | Last review by Mike Kozminsky on 2023-02-15 17:28:48