Accountancy · Ch 9 — Accounting Ratios
Total Assets to Debt Ratio
Total Assets to Debt Ratio
The Total Assets to Debt Ratio tells you how safely a company’s long-term debts are covered by its total assets. It answers the question: If the company had to sell everything it owns, would it have enough to pay off all its long-term loans?
The formula is straightforward:
Total Assets to Debt Ratio = Total Assets / Long-term Debts
Total Assets means everything the company owns — fixed assets, non-current investments, and current assets. Long-term Debts are borrowings that are due after more than one year (like debentures or long-term loans from banks). Short-term liabilities (creditors, bills payable) are not included in the denominator.
What the ratio tells you
A higher ratio is generally safer. It means:
- Assets have been financed mostly by owners’ funds (equity), not by borrowing.
- Long-term loans are well covered — even if assets are sold at a discount, there’s still enough to repay the debt.
A low ratio (close to 1 or below) signals risk: the company’s assets barely cover its long-term debts, and creditors may not get their money back if the company fails.
A useful variation: Net Assets (Capital Employed) instead of Total Assets
The textbook points out that it is often better to use Net Assets (also called Capital Employed) instead of Total Assets. Net Assets = Total Assets – Current Liabilities. When you do this, the ratio becomes the reciprocal of the Debt to Capital Employed Ratio.
If Debt to Capital Employed Ratio = 0.23 : 1, then Total Assets to Debt Ratio (using Net Assets) = 1 / 0.23 = 4.35 : 1 (approximately). This is just another way of looking at the same relationship.
Significance of the ratio
This ratio primarily shows two things:
- How much of the assets are financed by external funds (long-term debt). A lower ratio means more debt financing.
- How well long-term debts are covered by assets — the safety margin for creditors. …