What is the debt-to-asset ratio?

One of many indicators used for assessing a company’s financial health

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The finance world has a number of metrics for measuring the overall health of a company or individual; one is the debt-to-asset ratio. It’s a rather straightforward calculation — you simply divide the company’s total debt by its total assets. It reveals how much leverage a company may have when the time comes to borrow money.

Like other financial indicators, though, one ratio doesn’t reveal the entire picture of a company’s (or individual’s) financial health or distress, but it does provide a quick snapshot. Let’s take a closer look at how investors and bankers can use a company’s debt-to-asset ratio when examining a company’s financial performance.


Key insights

Investors and bankers consider a company’s debt-to-asset ratio a key indicator of its leverage.

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The debt-to-asset ratio shows how much of a company’s total assets were financed with debt.

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You can find a company’s debt-to-asset ratio by dividing its total debt by its total assets.

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Debt-to-asset ratio defined

A company’s debt-to-asset ratio shows what percentage of its assets is funded by interest-bearing debt, or liabilities. The ratio does not include any funding from the company’s suppliers or shareholders. You may also see it simply referred to as the debt ratio.

A company’s debt-to-asset ratio shows how much of its holdings, such as cash, real estate or equipment, is paid for with borrowed money. A higher number means the company owes more compared to what it owns, while a lower number shows it owes less.

Debt-to-asset is simply total debt divided by the total assets, and it indicates the percentage of its assets that are funded by debt.”
— Adam McDiarmid, president, small and medium business group, UMB Bank

“This is another type of leverage ratio. Debt-to-asset is simply total debt divided by the total assets, and it indicates the percentage of its assets that are funded by debt,” explained Adam McDiarmid, president of the small and medium business group at UMB Bank.

What is a good debt-to-asset ratio?

The debt-to-asset ratio looks different for each company and depends on what the industry norm is and where it is in the lifecycle of a company. In general though, any company with a ratio of one may be considered too risky, because it indicates a high level of debt versus what it owns, which may not be stable over the long term.

“Similar to the debt-to-equity ratio, this ratio needs to be compared to peers in the same industry to determine an appropriate ratio. If the ratio exceeds one, then it means that there are more liabilities than there are assets. Depending on the circumstances this figure could be an indication of insolvency,” added McDiarmid.

Having a higher debt-to-asset ratio can signal to investors or bankers that your company will only qualify for loans with higher interest rates, since a higher debt-to-asset ratio can indicate greater financial risk.

» MORE: What is a debt management plan?

The debt-to-asset formula

You can calculate a company’s debt-to-asset ratio, but it requires having the balance sheet in front of you first.

Once you have the balance sheet, locate the company’s current and long-term liabilities. Liabilities can include loans, bonds or other forms of debt. Sum up all of the liabilities for the total debt number.

Next, add up the company assets. This includes all current assets, including cash, receivables and inventory. It also includes non-current assets, such as real estate or equipment. Adding these together gives you the total assets number.

Lastly, divide the total debts by the total assets, and you’ll have the debt-to-asset ratio, or percentage.

 » READ: What is debt forgiveness?

Debt-to-asset ratio vs. debt-to-equity ratio

A company’s debt-to-equity ratio refers to how much equity a company has for every dollar of debt it holds. While the debt-to-asset ratio shows how much of the company’s assets are financed by debt, the debt-to-equity ratio compares how much debt the company has versus the amount of shareholder equity.

Investors and bankers use both ratios when analyzing a company’s financial risk, but each does so in a different way. Like debt-to-asset ratios, bankers and investors pay close attention to this number when a company applies for financing because it’s another signal for potential risk.

Having a higher debt-to-equity ratio implies greater reliance on debt financing, which can look riskier for investors. However, having a lower ratio can suggest the company uses a more conservative approach to financing by relying on equity.

» MORE: What is debt collection and how does it work?

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    FAQ

    Can the debt-to-asset ratio be negative?

    No, you can’t have a negative debt-to-asset ratio. This is because both total debt and total assets are typically positive numbers. A company cannot have negative debt or negative assets, which are the two components of measurement in the debt-to-asset ratio calculation.

    What are the limitations of the debt-to-asset ratio?

    While the debt-to-asset ratio may be a key leverage indicator, it does have limitations. The ratio does not account for the quality of assets (including liquidity), nor does it consider the terms of the debt. It also does not provide information about a company's profitability or cash flow, which are an essential part of debt repayment plans and may lower the company’s risk profile.

    How does the debt-to-asset ratio affect investors and creditors?

    Investors and creditors can use the debt-to-asset ratio when assessing the financial health of a company. When they see a high debt ratio, it may signal the company has a higher risk of either not being able to secure additional financing or only qualifying for higher interest rates on loans it can secure. On the other hand, a low ratio may indicate a strong balance sheet and lower financial risk to the investor.

    Bottom line

    Investors turn to indicators such as the debt-to-asset ratio when assessing a company’s overall financial health or risk. To find the number, you add up the company’s total debts and divide it by the company’s total assets.

    With this information in hand, an investor or banker can quickly assess how much leverage a company holds. If a company must borrow money in the future, then having a lower debt-to-asset ratio can show the company’s not as risky and may even qualify for more competitive interest rates with a loan.


    Article sources

    ConsumerAffairs writers primarily rely on government data, industry experts and original research from other reputable publications to inform their work. Specific sources for this article include:

    1. CFI, “Debt to Asset Ratio,” Accessed May 25, 2024.
    2. Harvard Business Review, “A Refresher on Debt-to-Equity Ratio.” Accessed May 24, 2024.
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