Skip to main content
Pearson+ LogoPearson+ Logo
Start typing, then use the up and down arrows to select an option from the list.

Ratios: Debt to Asset Ratio

Brian Krogol
Was this helpful?
Alright, here we go. With another ratio. The debt to assets ratio. So debt to assets ratio, what do you think? This could tell us about what it's gonna help us analyze how the company assets are financed. So the debt to asset ratio, it's a common uh solvency ratio. Right? It helps us understand how these assets are financed. And guess what? We're going to be focused on debt here, on liabilities. So remember assets, equal liabilities plus equity. Right. So the assets, everything the company owns, it's either financed by liabilities or by equity. So we're gonna be focused on how much of these assets are financed by liabilities in this case. Right. The debt ratio. Cool. So check it out. The debt ratio. Total liabilities divided by total assets. So what's that? Tell us, it tells us the proportion of the assets financed with debt. Right? So we're gonna get some percentage or some decimal, and it's gonna be that amount of the total assets. Well, that's what's financed by debt. Okay. So what do you think? What, a higher debt ratio or a lower debt ratio sound like a safer uh, investment? Well, a lower debt ratio. Right? Because when we have debt, well, that means we're gonna have to make debt payments, we're gonna have to be paying interest constantly. So, a lower debt ratio is generally safer than a higher ratio. Right, Because if we have low liabilities, Well, that means we have low debt payments. So there's less risk, there's less risk involved because there's not so much liabilities that we're gonna be forced to pay out equity? we're not as much for to pay out equity. Reit dividends is not a force payment where a bank loan, where they say, where's my interest? You owe me interest for the past year? Well, they're going to make sure that they get that money right. If they don't, if you don't pay that money, they're going to default on your loan and you're gonna owe a lot more money. Cool. So it's a very easy ratio, total liabilities divided by total assets and we'll get some number there. Alright, let's go ahead and jump into some practice and you guys figure out these debt ratios. Alright, let's do it now.