Debt to Assets Ratio – (Calculation and Importance)

Debt to Assets ratio is the financial parameter to calculate the percentage of Debt, which was paid from their assets. Some of the investor use this indicator as company financial health and some interpret that the company capability to pay their liability.

The whole business in any sector revolve around “assets” and “liability”

In simple language, some time assets are higher than the liability and sometimes liability are higher.

Debt to Assets ratio formula

It is very simple and understandable to all new investors:

Also Read: What is Market Capitalization (Easy to understand)

Debt to assets ratio is calculated:

Debt to assets ratio = Total Debt/Total Assets

Total debt considered to be all kind of debt (i.e. Long-Term Debt and Short-Term Debt)

Total assets include all assets (current, fixed, tangible, intangible)

What is Debt Consolidation?

Debt consolidation is the process of bringing all debt classes into one category and plan the repay the debt by single financial action.

Also Read: What is Return on Capital Employed

For instance:

Mainly we use to pay mobile bills, rents, school fees, grocery etc in different modes and different dates. if we use our credit card to pay all the payments and on the date of credit card bill payment we only have to pay credit card bill.

This process is debt consolidation.

debt to asset ratio formula

How to evaluate Debt to assets ratio

You have to understand the concept of Debt to asset ratio, While analyzing the ratio If the Ratio is less then (1%) that means the company is capable of generating high-value assets from the low-value liability and vice versa.

Also Read: What is Dividend Adjusted PEG Ratio

It also indicates, that If company face the challenge of bankruptcy.

Is the company capable of paying all their liability from their asset? All Banking sector and Financial institutes analyzing the ratio before sanctioning further loans.

Every company is facing debt problems, and if the company management unable to control the challenge, the same will be converted into Non-performing assets for the Leaders.

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