Total debt to total assets ratio

Definition

The total debt to total assets ratio is a financial metric used to evaluate the financial leverage of a company.

What is a total debt to total assets ratio?

It provides insight into the proportion of a company’s assets that are financed by debt, as opposed to equity. 

Here’s how to calculate the total debt to total assets ratio:

Total debt to total assets ratio = total debt / total assets

A higher ratio indicates a greater portion of a company’s assets are funded by debt, which can be an indicator of higher financial risk. Conversely, a lower ratio suggests that a company relies less on borrowed funds and is potentially less leveraged.

Lenders and investors use this ratio to assess the risk associated with a company’s debt load. A higher ratio may lead to higher interest rates for borrowing or may make it more challenging to secure credit.

It’s essential to compare this ratio with industry peers and historical performance to gain a more meaningful perspective on a company’s financial position.

Example of total debt to total assets ratio

Let’s consider Company XYZ, a manufacturing firm, which has the following financial information:

• Total debt: R500,000
• Total assets: R1,000,000

To calculate the total debt to total assets ratio for Company XYZ, we use the formula listed above:

Total debt to total assets ratio = R500,000 / R1,000,000 = 0.5

In this example, Company XYZ’s total debt to total assets ratio is 0.5, or 50%. This means that 50% of the company’s total assets are financed by debt.