Debt to Asset Ratio Calculator
Answers the Question
How bad is our debt situation?
Calculator for Debt to Asset Ratio
What Is the Debt to Asset Ratio?
At its heart, this ratio is a measure of the impact of debt upon a corporation. Values above 0.5 indicate that the firm is financed by debt (rather than equity).
Why Is it Important?
- It can be used as a measure of leverage. The higher the debt to asset ratio, the greater the leverage, and the higher the risk of default and inability to invest in new opportunities.
Formula(s) to Calculate Debt to Asset Ratio
- DEBT TO ASSET RATIO = DEBTS / ASSETS
Common Mistakes
- Not considering the terms of the debt, such as future escalations in interest.
- Not considering the opportunity cost of debt. The greater the unpaid debt, the more difficult to take on new debt.
- Inaccurate considerations of intangibles when calculating assets. Goodwill, in particular, is rife with potential for abuse.
- Not taking industry norms and life-cycle stage into account. What may make sense for one firm may not make sense for another.