Debt to Assets Ratio Calculation
Financial ratios are used to analyze the financial results of a company either over time or when compared with other companies in the same industry. They are created by dividing items on a company's financial statements with other related items. Many ratios are now standardized and are recognized as useful indicators of financial results. These ratios have become benchmarks used by external parties to make a variety of investment decisions.
Other People Are Reading
-
Financial Statements
-
Three of the major financial statements that companies use are the income statement, the balance sheet and the statement of changes in cash. The income statement summarizes the results of income-producing activities for a reporting period. The balance sheet shows assets, liabilities and shareholder equity as of a specific date. The statement of changes in cash show how a company received and used cash for the reporting period.
Assets and Liabilities
-
Assets are a company's economic resources. Some examples of a company's assets include cash, accounts receivable, inventories, land, buildings and machinery. A company's liabilities are the economic obligations that it incurred to fund its operations and purchase its assets. Some examples of a firm's liabilities include accounts payable, notes payable, taxes and other monies owed, and long term debt.
-
Debt to Asset Ratio
-
The debt to asset ratio can help you analyze the balance sheet. The debt to asset ratio is one of a number of ratios that helps understand a firm's balance sheet. The debt to asset ratio is used as an indicator of a firm's stability and long-run solvency. It is calculated by taking a firm's total liabilities and dividing the number by the total assets. The result indicates how the company is financing its assets. A result under 1 indicates that assets are mainly funded using equity, while a number greater than 1 indicates that they are funded through debt.
Implications of Debt to Asset Ratio
-
A high debt to asset ratio may indicate financial problems. A company that has more liabilities than assets -- a high debt to asset ratio compared to other companies in the same industry -- may be facing financial problems. Funding assets through debt is referred to as "leverage." A high debt ratio indicates that a company is highly leveraged and may have trouble obtaining additional financing. A company also may be exposed if creditors, nervous about the high debt, demand repayment. Another concern is that the company may have problems making interest and principal payments.
-
References
Resources
- Photo Credit Hemera Technologies/Photos.com/Getty Images Thinkstock/Comstock/Getty Images Todd Warnock/Lifesize/Getty Images
