Partner Logo
Home  > Debt to Asset Ratio
 Share  Print Version  Email

Debt to Asset Ratio

Simple Alliance, Kenya Limited


Definition

Your business’ debt to asset ratio, or simply debt ratio, is an important ratio within financial statements.

Function

To the Business Owner

Essentially, your debt ratio tells you the level to which your business’ assets are burdened by debt.  The ratio tells you the relative share of debt and owners’ equity that has gone into financing your business.  It determines the share of your business’ assets that has been funded via debt. This evaluation gives you an idea of two key business elements, namely:   

  • The risks your business potentially faces based on its debt obligations
  • The leverage of your business 

To Third Parties

Other entities could be interested in your business’ dent to asset ratio. Some important parties include:

  • Creditors
  • Investors

Creditors

Your existing and potential creditors could make use of your business’ debt to asset ratio. They do this by analysing your possibility of not honouring your obligations to settle your accounts with them. This could pertain to loans you have received or to credit facilities you have been granted.  Creditors prefer a low debt to asset ratio.   

Investors

Investors are a significant cadre of third-party entities. Investors use your business debt to asset ratio to evaluate your business’ level of risk.  

Formula

To arrive at your debt to asset ratio, divide the sum of your business’ liabilities by your total assets.    

Debt to Asset Ratio = Total Liabilities(Debt)/ Total Assets

Principles

You make certain calculations depending on the debt to asset ratio you arrive at. You could obtain debt ratios of:

  • Less than one (>1)
  • More than one (<1)

>1 Debt to Asset Ratio

A less than one debt ratio indicates that majority of your business assets are funded via equity. Essentially, your business’ has more assets than debts.

<1 Debt to Asset Ratio

If you obtain a debt ratio of more than one, it indicates that majority of your business’ assets are funded via debt. Basically, your business’ debts outweigh your assets.

Standards

Businesses with high debt to asset ratios are regarded as being highly leveraged.  These businesses may be endangered in case creditors ask the proprietor(s) to settle their debts.  Generally, a stable, healthy business has a proper balance between assets acquired via owner equity and those acquired through debt.  A low debt to asset ratio indicates your ability to push through during hard economic times.   

Useful Help

Efficiency, speed, and accuracy are becoming the hallmarks of good practice in the 21st century. To abide by this noble movement, we have created an easy to use debt to asset calculator for your use. The calculator is in the below grey box.

Using the Debt to Asset Calculator

In order to derive the desired efficiency from the calculator, you need to go by some simple steps, namely:   

  • Obtain the relevant asset and debt figures from your business’ latest balance sheets
  • Enter the sum total of your assets in the Total Assets slot
  • Enter your sum total of debt in the Total Debt slot
  • Click the Calculate button

Your debt to asset ratio shows the share of your business’ assets that have been acquired via debt. You calculate the ratio by dividing your total debt by your total assets. You as well as your creditors would use the debt to asset ratio to determine the ability of your business to meet its obligations. A less than one ratio is a warning that your business debts outweigh your assets. A more than 1 ratio indicates proper debt to asset balance. You can use the above debt to asset calculator so as to incorporate speed, accuracy, and efficiency into your computation.

Copyright (C) 2016, Simple Alliance Kenya Limited

 Share  Print Version  Email
Comments &Ratings (0)
If you are a human, do not fill in this field.
Click stars to rate.
   Comments are truncated at 1000 characters