Debt to Asset Ratio Formula & Example

Definition: Debt to Asset Ratio is calculated by dividing the firm’s total liabilities by its total assets. It indicates the percentage of a firm's assets that are financed via debt.

Formula:
Debt to Asset Ratio = Total Debt / Total Assets
(Note: total debt is the sum of long-term liabilities and current liabilities)

Example 1:
Penn Ltd has $400,000 in assets, $80,000 in liabilities, and $40,000 in stockholders’ equity. Then, the debt to total assets ratio would be: 80,000 / 400,000 = 0.2. This means that 20% of the corporation’s assets are financed by the creditors and 80% is financed by the owners.

Example 2:
CIM Ltd has the following data:
Goodwill $60,000
Buildings $900,000
Office Equipment $100,000
Loan $500,000
Creditors $40,000
Bank Overdraft $10,000
Stock $55,000
Debtors $25,000
Cash $15,000

Then,
Total Debts = 500,000 + 40,000 + 10,000 = $550,000
Total Assets = Fixed assets + Current assets = (60,000 + 900,000 + 100,000) + (55,000 + 25,000 + 15,000) = $1,155,000
Debt to Asset Ratio = 550,000 / 1,155,000 = 0.48 (or 48%)

* Next: Sales to Capital Employed Ratio
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