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debt to asset ratio interpretation

Total assets may include both current and non-current assets, or certain assets only depending on the discretion of the analyst. We endeavor to ensure that the information on this site is current and accurate but you should confirm any information with the product or service provider and read the information they can provide. Given those assumptions, we can input them into our debt ratio formula. The negative implications of having a high ratio are that it becomes expensive to incur additional debt, the chances of default increase, and the financial flexibility decreases. The company will have to pay interest payments and principal, eating into the company’s profits.

Why the Debt-to-Asset Ratio Is Important for Business

  • He currently researches and teaches economic sociology and the social studies of finance at the Hebrew University in Jerusalem.
  • These measures take into account different figures from the balance sheet other than just total assets and liabilities.
  • The debt-to-total-assets ratio is a very important measure that can indicate financial stability and solvency.
  • Finance Strategists has an advertising relationship with some of the companies included on this website.
  • An increasing trend line reflects that the business cannot pay down its debt, indicating a possible bankruptcy.
  • Also, no stock in FSMDX accounts for more than 0.67% of the portfolio.

Depending on averages for the industry, there could be a higher risk of investing in that company compared to another. FXAIX is a popular fund because it provides low-cost access to a high-quality portfolio. The S&P 500 companies don’t deliver every year, but they have an impressive record over longer timeframes. The index’s average annual return between 1993 and 2023, for example, was about 9%, net of inflation and including dividends. For Regeneron Pharmaceuticals in the Biotechnology industry, the PE, PB, and PS ratios are all low compared to peers, indicating potential undervaluation. The high ROE, EBITDA, and gross profit suggest strong profitability and operational efficiency relative to industry competitors.

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As with all other ratios, the trend of the total debt-to-total assets ratio should be evaluated over time. This will help assess whether the company’s financial risk profile is improving or deteriorating. For example, a trend of increasing leverage use might indicate that a business is unwilling or unable to pay down its debt, which could signify issues in the future. A company’s debt-to-asset ratio is one of the groups of debt or leverage ratios that is included in financial ratio analysis. The debt-to-asset ratio shows the percentage of total assets that were paid for with borrowed money, represented by debt on the business firm’s balance sheet. It is an indicator of financial leverage or a measure of solvency.

What is the debt-to-asset ratio formula?

debt to asset ratio interpretation

This leverage ratio is also used to determine the company’s financial risk. The debt to assets ratio formula is calculated by dividing total liabilities by total assets. A valid critique of this ratio is that the proportion of assets financed by non-financial liabilities https://www.bookstime.com/ (accounts payable in the above example, but also things like taxes or wages payable) are not considered. In other words, the ratio does not capture the company’s entire set of cash “obligations” that are owed to external stakeholders – it only captures funded debt.

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  • They must be assessed in relation to other metrics, in relation to other periods, and in relation to other businesses, industry averages, and expectations.
  • However, it is important to consider the limitations of the ratio and analyze it in conjunction with other financial metrics to obtain a comprehensive understanding of a company’s financial health.
  • As with all financial metrics, a “good ratio” is dependent upon many factors, including the nature of the industry, the company’s lifecycle stage, and management preference (among others).
  • It is important to assess the reasons behind any significant changes in the ratio and consider the company’s long-term financial strategy.

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Understanding Liquidity Ratios: Types and Their Importance – Investopedia

Understanding Liquidity Ratios: Types and Their Importance.

Posted: Sat, 25 Mar 2017 22:39:31 GMT [source]

For information pertaining to the registration status of 11 Financial, please contact the state securities regulators for those states in which 11 Financial maintains a registration filing. If hypothetically liquidated, a company with more assets than debt could still pay off its financial obligations using the proceeds from the sale. One shortcoming of this financial measure is that it does not provide any information about the quality of assets. Instead, it lumps tangible and intangible assets and presents them as a single entity. Company C can be assumed as a small company that may not be as enticing to shareholders as company A or B. As a result, Company C might find it too hard to attract investors and opts for debt financing to meet its capital needs.

Current Ratio

debt to asset ratio interpretation

It provides insights into the proportion of a company’s assets financed by debt and helps stakeholders evaluate risk levels and make informed investment decisions. However, it is important to consider the limitations of the ratio and analyze it in conjunction with other financial metrics to obtain a comprehensive debt to asset ratio understanding of a company’s financial health. The total debt-to-total assets ratio compares the total amount of liabilities of a company to all of its assets. The ratio is used to measure how leveraged the company is, as higher ratios indicate more debt is used as opposed to equity capital.

High Debt to Assets Ratio

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