# Total-Debt-to-Total-Assets Ratio: Meaning, Formula, and What's Good (2023)

## What Is the Total-Debt-to-Total-Assets Ratio?

Total-debt-to-total-assets is a leverage ratio that defines how much debt a company owns compared to its assets. Using this metric, analysts can compare one company's leverage with that of other companies in the same industry. This information can reflect how financially stable a company is. The higher the ratio, the higher the degree of leverage (DoL) and, consequently, the higher the risk of investing in that company.

### Key Takeaways

• The total-debt-to-total-assets ratio shows the degree to which a company has used debt to finance its assets.
• The calculation considers all of the company's debt, not just loans and bonds payable, and considers all assets, including intangibles.
• The total-debt-to-total-assets ratio is calculated by dividing a company's total amount of debt by the company's total amount of assets.
• If a company has a total-debt-to-total-assets ratio of 0.4, 40% of its assets are financed by creditors, and 60% are financed by owners' (shareholders') equity.
• The ratio does not inform users of the composition of assets nor how a single company's ratio may compare to others in the same industry.

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## Understanding the Total-Debt-to-Total-Assets Ratio

The total-debt-to-total-assets ratio analyzes a company's balance sheet. The calculation includes long-term and short-term debt (borrowings maturing within one year) of the company. It also encompasses all assets—both tangible and intangible. It indicates how much debt is used to carry a firm's assets, and how those assets might be used to service debt. It, therefore, measures a firm's degree of leverage.

Debt servicing payments must be made under all circumstances, otherwise, the company would breach its debt covenants and run the risk of being forced into bankruptcy by creditors. While other liabilities such as accounts payable and long-term leases can be negotiated to some extent, there is very little “wiggle room” with debt covenants.

(Video) Financial Statement Analysis (Debt-to-Assets Ratio)

A company with a high degree of leverage may thus find it more difficult to stay afloat during a recession than one with low leverage. It should be noted that the total debt measure does not include short-term liabilities such as accounts payable and long-term liabilities such as capital leases and pension plan obligations.

### Total-Debt-to-Total-Assets Formula

The total-debt-to-total-assets formula is the quotient of total debt divided by total assets. As shown below, total debt includes both short-term and long-term liabilities. All company assets, including short-term, long-term, capital, tangible, or other.

\begin{aligned} &\text{TD/TA} = \frac{ \text{Short-Term Debt} + \text{Long-Term Debt} }{ \text{Total Assets} } \\ \end{aligned}TD/TA=TotalAssetsShort-TermDebt+Long-TermDebt

If the calculation yields a result greater than 1, this means the company is technically insolvent as it has more liabilities than all of its assets combined. More often, the total-debt-to-total assets ratio will be less than one. A calculation of 0.5 (or 50%) means that 50% of the company's assets are financed using debt (with the other half being financed through equity).

## What Does the Total-Debt-to-Total-AssetsRatio Tell You?

Total-debt-to-total-assets is a measure of the company's assets that are financed by debt rather than equity. When calculated over a number of years, this leverage ratio shows how a company has grown and acquired its assets as a function of time.

Investors use the ratio to evaluate whether the company has enough funds to meet its current debt obligations and to assess whether the company can pay a return on its investment. Creditors use the ratio to see how much debt the company already has and whether the company can repay its existing debt. This will determine whether additional loans will be extended to the firm.

A ratio greater than 1 shows that a considerable portion of the assets is funded by debt. In other words, the company has more liabilities than assets. A high ratio also indicates that a company may be putting itself at risk of defaulting on its loans if interest rates were to rise suddenly.

A ratio below 0.5, meanwhile, indicates that a greater portion of a company's assets is funded by equity. This often gives a company more flexibility, as companies can increase, decrease, pause, or cancel future dividend plans to shareholders. Alternatively, once locked into debt obligations, a company is often legally bound to that agreement.

A total-debt-to-total-asset ratio greater than one means that if the company were to cease operating, not all debtors would receive payment on their holdings.

(Video) Debt Ratio

## Real-World Example of the Total-Debt-to-Total-Assets Ratio

Let's examine the total-debt-to-total-assets ratio for three companies:

• Alphabet, Inc. (Google), as of its fiscal quarter ending March 31, 2022.
• Costco Wholesale, as of its fiscal quarter ending May 8, 2022.
• Hertz Global Holdings, as of its fiscal quarter ending March 31, 2022.

Article Sources

Investopedia requires writers to use primary sources to support their work. These include white papers, government data, original reporting, and interviews with industry experts. We also reference original research from other reputable publishers where appropriate. You can learn more about the standards we follow in producing accurate, unbiased content in oureditorial policy.

1. Google. "Form 10-Q," Page 5.

2. Hertz. "Form 10-Q," Page 5.

(Video) Understanding Debt to Equity Ratio

## FAQs

### What is a good total debt to total assets ratio? ›

Generally speaking, a debt-to-equity or debt-to-assets ratio below 1.0 would be seen as relatively safe, whereas ratios of 2.0 or higher would be considered risky. Some industries, such as banking, are known for having much higher debt-to-equity ratios than others.

Do you want a high or low debt to total assets ratio? ›

For creditors, a lower debt-to-asset ratio is preferred as it means shareholders have contributed a large portion of the funds to the business, and thus creditors are more likely to be paid.

Is 0.8 debt to asset ratio good? ›

In general, many investors look for a company to have a debt ratio between 0.3 and 0.6. From a pure risk perspective, debt ratios of 0.4 or lower are considered better, while a debt ratio of 0.6 or higher makes it more difficult to borrow money.

What does a debt to asset ratio of 0.8 mean? ›

Debt ratio = 8,000 / 10,000 = 0.8. This means that a company has \$0.8 in debt for every dollar of assets and is in a good financial health.

Is a debt ratio of 50% good? ›

A high risk level, with a high debt ratio, means that the business has taken on a large amount of risk. If a company has a high debt ratio (above . 5 or 50%) then it is often considered to be"highly leveraged" (which means that most of its assets are financed through debt, not equity).

What is a too high debt ratio? ›

Key Takeaways

Debt-to-income ratio is your monthly debt obligations compared to your gross monthly income (before taxes), expressed as a percentage. A good debt-to-income ratio is less than or equal to 36%. Any debt-to-income ratio above 43% is considered to be too much debt.

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