Debt to Asset Ratio
Debt to asset ratio is the leverage ratio which is used to measure the total amount of assets which are financed by the creditors. In simple words It borrowing funds assets with the investors’ funds assets.
This ratio shows how the company acquired its assets over time. To getting capital company generated the investor interest, to acquire the company’s assets company produce profit, or take on debt.
This ratio is very important because it shows how much the company is leverage. He tells that how much resources of company owned by the shareholder in the form of equity and how much owned by the creditor in debt form.
Investor and creditor use this ratio for the calculation.
Investors want that the company is solvent, and the company has enough cash for its current obligation, and it will be able to payoff return on investor’s investment. Investors want to analyze how much debt already the company has.
If the company as high debt then for a company it is difficult to extend its operation.
How to calculate debt to asset ratio
Debt to asset ratio formula we can be calculated by dividing the total debt by total asset that is:
Debt to Asset Ratio = Total debt/ Total asset
From the above calculation, we can easily calculate the total debt as a percentage of total asset.
Through the debt to asset ratio investor, creditors and analyst calculate the overall risk of the company.
If the ratio is high then the company considered riskier for investment and the company is more leverage.
Higher ratio company will have to pay its more profit in principal and interest payment.
So for investment lower ratio company is better as compared to the high ratio.
If the debt to asset ratio is equal to 1 then the total liabilities of the company is equal to total assets so this is the high leveraged company.
If the ratio is greater then 1 then it means that assets are less then the current liabilities then it is the riskiest and extremely leveraged company.
If the DTA ratio is less then 1 then it is the more suitable company for investment because it has greater assets as compared to total liabilities of the company.
The company constructs a new building as a store for which the company needs a loan. Total liabilities of the company is $50,000 and the total asset is %100,000. DTA of the company calculated as
Debt to Asset ratio= 50,000/100,000
From the above result, we know that the above company has double assets as compared to total liabilities. In the loan process, a bank takes this result into consideration.
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