Debt to Asset Ratio Calculator
What is the Debt to Asset Ratio?
The debt to asset ratio is a relation between total debt and total assets of a business, showing what proportion of assets is funded by debt instead of equity.
A high debt to asset ratio signifies a higher financial risk, but in the case of a strong, growing economy, a higher equity return.
This metric is often used by investors and creditors. Investors use it to evaluate two things: 1) whether the company has enough funds to pay its debts, and 2) whether it can pay the return on its investments. Creditors use it to assess the possibility of giving additional loans to the company. If the debt to asset ratio is significantly high, this indicates that repaying existing debts is already unlikely, so follow-on loans are a high-risk investment.
Debt to Asset Ratio Formula
In order to calculate the debt to asset ratio, you will need two parameters from your company’s balance sheet:
Total Debt: Short-term & long-term debt
Total Assets: All assets the company owns
At Flow Capital, we provide alternative debt to high-growth companies. Let’s say two companies apply for growth capital, so we begin by looking into their balance sheets:
- Total Debt: $15.2M
- Total Assets: $58.4M
- Total Debt: $27.8M
- Total Assets: $22.1M
By using the debt to asset formula mentioned above, we get the following results:
- (15.2/58.4) * 100% = 26.03%
- (27.8/22.1) * 100% = 125.80%
What do these results mean?
Company A’s ratio is low, which means that the majority of the company’s assets are funded by equity. We can suppose that Company A is in a rather good financial condition.
On the other hand, Company B has a much higher ratio, which indicates it is in a much risker situation since its liabilities (debt) exceed its assets.
As a result, it would make more sense for Flow Capital to give a loan to Company A.