Debt-Asset Ratio = Total Liabilities ÷ Total Assets
Indicates what proportion of the company's assets are being financed through debt.
Things to remember
- This ratio is very similar to the debt-equity ratio.
- A ratio under 1 means a majority of assets are financed through equity, above 1 means they are financed more by debt. Furthermore you can interpret a high ratio as a "highly debt leveraged firm".
Not a particularly exciting ratio, but a useful one. Cory's Tequila Co.'s debt/asset ratio is fairly low, meaning that its assets are financed more through equity rather than debt. Also, Cory's Tequila Co. has no long term debt and shouldn't have to worry about creditors getting nervous. Companies with high ratios are placing themselves at risk, especially in an increasing interest rate market. Creditors are bound to get worried if the company is exposed to a large amount of debt and may demand that the company pay some of it back.