What is the debt to asset ratio, how is it calculated, what does it measure?

March 19 :: The debt to asset ratio is the percentage of total debt financing the firm uses as compared to the percentage of the firm’s total assets. It helps you see how much of your assets are financed using debt financing

Step 1: To calculate the debt to asset ratio, you look at the firm’s balance sheet; specifically, the liability side of the balance sheet. Add together the current liabilities and the long-term debt.

Step 2: Look at the asset side of the balance sheet. Add together the current assets and the net fixed assets.

Step 3: Divide the result from Step 1 (total liabilities or debt) by the result from Step 2 (total assets). You will get a percentage. For example, if your total debt is $100 and your total assets are $200, then your debt to assets ratio is 50%.

This means that 50% of your firm is financed by debt financing and 50% of your firm’s assets is financed by your investors or by equity financing.

In order for this to mean anything to you, you need to compare this result with other years of data for your firm (trend analysis) and with the debt to assets ratio for other firms in your industry. If your debt ratio is too high, then you need to take a serious look at why.