Legal Definitions - debt-to-total-assets ratio

The debt-to-total-assets ratio is a financial metric used to measure a corporation's total long-term and short-term liabilities divided by the firm's total assets. This ratio is also known as the debt ratio.

A low debt ratio indicates conservative financing, which means that the company has a reduced risk of defaulting on its loans. This also means that the company has an enhanced ability to borrow in the future.

Let's say that Company A has $500,000 in total assets and $100,000 in total liabilities. The debt-to-total-assets ratio for Company A would be:

Debt-to-total-assets ratio = Total liabilities / Total assets

Debt-to-total-assets ratio = $100,000 / $500,000

Debt-to-total-assets ratio = 0.2 or 20%

This means that 20% of Company A's assets are financed by debt.

Another example is Company B, which has $1,000,000 in total assets and $800,000 in total liabilities. The debt-to-total-assets ratio for Company B would be:

Debt-to-total-assets ratio = Total liabilities / Total assets

Debt-to-total-assets ratio = $800,000 / $1,000,000

Debt-to-total-assets ratio = 0.8 or 80%

This means that 80% of Company B's assets are financed by debt, which indicates that the company has a higher risk of defaulting on its loans.

In summary, the debt-to-total-assets ratio is a useful financial metric that helps investors and creditors assess a company's financial health and risk level.