# Debt-to-Total-Assets Ratio Definition

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Updated on March 29, 2023

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The debt to total assets ratio describes how much of a company's assets are financed through debt. It is also otherwise known as the debt ratio.

This measure is closely watched by lenders and creditors since they want to know whether the company owes more money than it possesses.

## Why Is Debt-To-Total-Assets Ratio Important?

The debt-to-total-assets ratio is important for companies and creditors because it shows how financially stable a company is.

A higher debt-to-total-assets ratio indicates that there are higher risks involved because the company will have difficulty repaying creditors.

A company in this case may be more susceptible to bankruptcy if it cannot repay its lenders. Thus, lenders and creditors will charge a higher interest rate on the company's loans in order to compensate for this increase in risk.

Furthermore, prospective investors may be discouraged from investing in a company with a high debt-to-total-assets ratio.

On the other hand, a lower debt-to-total-assets ratio may mean that the company is better off financially and will be able to generate more income on its assets. Higher interest rates can help boost returns for shareholders.

## How to Calculate Debt-To-Total-Assets Ratio

The debt-to-total-assets ratio is calculated by dividing total liabilities by total assets.

Total assets may include both current and non-current assets, or certain assets only depending on the discretion of the analyst.

## Example

XYZ Company has recorded the following items in its balance sheet:

Calculate the debt-to-total-asset ratio for XYZ Company. This means that 31% of XYZ Company's assets are being funded by debt.

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

Here's how to interpret the results of the debt-to-total-assets ratio:

### Ratio = 1

A ratio that equates to 1 or a 100% debt-to-total-assets ratio means that the company's liabilities are equally the same as with its assets.

The company in this situation is highly leveraged which means that it is more susceptible to bankruptcy if it cannot repay its lenders.

### Ratio < 1

A ratio that is less than 1 or a debt-to-total-assets ratio of less than 100% means that the company has greater assets than liabilities.

This may be advantageous for creditors because they are likely to get their money back if the company defaults on loans.

### Ratio > 1

A ratio that is greater than 1 or a debt-to-total-assets ratio of more than 100% means that the company's liabilities are greater than its assets.

In this case, the company is not as financially stable and will have difficulty repaying creditors if it cannot generate enough income from its assets.

## Final Thoughts

The debt-to-total-assets ratio is a very important measure that can indicate financial stability and solvency. This ratio shows the proportion of company assets that are financed by creditors through loans, mortgages, and other forms of debt.

While it may be beneficial for companies to have lower debt ratios in order to attract investors, this number should not be too low because the company will need some level of funding in order to operate successfully.