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
Category:

Author

Kelvin Wong Loke Yuen is an experienced writer with a strong background in finance, specializing in the creation of informative and engaging content on topics such as investment strategies, financial ratio analysis, and more. With years of experience in both financial writing and education, Kelvin is adept at translating complex financial concepts into clear, accessible language for a wide range of audiences. Follow him on: LinkedIn.

Popular posts from this blog

Advantages & Disadvantages of Reducing Balance Method

Advantages of Reducing Balance Method of Depreciation (also known as diminishing balance method, written down value method or reducing installment method): 1. Simplicity and Ease of Use One of the main advantages of the Reducing Balance Method is its simplicity. The method requires only a basic understanding of how to calculate depreciation using the fixed percentage rate applied to the asset's book value. Once the initial cost of the asset and the depreciation rate are determined, it is relatively straightforward to calculate the depreciation expense for each period. This simplicity makes it easy for accountants and businesses to apply this method, particularly when dealing with multiple assets. Moreover, as the method doesn’t require complex estimations of residual values or changes in useful life, businesses can easily calculate depreciation year over year, providing a clear and consistent framework for accounting. This also simplifies financial reporting and compliance with
Read more

Advantages and Disadvantages of Swaps

A swap is a financial derivative instrument that involves the exchange of a series of cash flows between two parties over a specified period. Typically, swaps are used to manage risk, particularly interest rate and currency risk, by converting variable cash flows into fixed ones or vice versa. Swaps can also be employed to align liabilities with revenues, hedge against fluctuations in commodity prices, or manage exchange rate risk. The two most common types of swaps are interest rate swaps and currency swaps, although other variations such as commodity swaps and equity swaps also exist. Swaps have grown in popularity due to their ability to offer more customized solutions compared to traditional financial instruments such as futures, options, or forwards. Despite their advantages, swaps also come with certain risks and drawbacks, which must be carefully considered before entering into such contracts. Below, we explore both the advantages and disadvantages of swaps in more detail. Adv
Read more

How to Calculate Debenture Interest

Debenture is a liability instrument with a fixed rate of interest, and the holders of debenture are considered as creditors of the limited company. Interest on debentures is calculated at a fixed rate of interest on the face value (not on the issue price), and is charged to Profit and Loss Account. Note that such interest must be paid to the debenture holders even if the company is not making a profit or incurring losses. Nature of Debentures Debentures are long-term debt instruments issued by companies, typically with a fixed interest rate and a set maturity date. They are a key tool for companies looking to secure funding without diluting ownership, as debentures do not confer any equity rights to the holders. Instead, debenture holders act as creditors, and their claims on the company are generally subordinate to other types of liabilities such as bank loans or trade payables. Debentures are classified as unsecured or secured. Secured debentures are backed by a specific asset or se
Read more