Debt to Asset Ratio
Debt to asset ratio is one of the important leverage ratios that is used for calculating the percentage of assets that are financed by debt in a business. It is also known as debt ratio.
In other words, debt to asset ratio depicts the percentage of assets that are funded by creditors among the total assets of the business.
Debt to asset ratio provides an insight into the financial leverage availed by the business and is also regarded as a measure of solvency of a business. This ratio also provides the financial managers an idea about the health of the business, whether it is growing or experiencing financial distress.
It is also used by creditors to decide whether any additional credit will be provided to the business and on the other hand investors use this ratio for determining the capability of the business to meet its present and future obligations and whether it is capable of generating a return on the investment done by them.
Calculation of Debt to Asset Ratio
Debt to asset ratio can be calculated by dividing the total debts or liabilities of the business by the total assets.
It can be represented by a formula in the following way
Debt to Asset Ratio = Total Debt / Total Assets
If the value of the debt to assets ratio is 1, it means that the company has equal amounts of assets and liabilities. It indicates that the company is highly leveraged.
If the value of the debt to assets ratio is less than 1, it implies that the company possesses assets in excess to its liabilities. Therefore, if any obligations arise, it can be settled by selling the assets. A lower debt ratio indicates that a company is less risky.
If the value of debts to asset ratio is more than 1, it indicates that liabilities or debts are more than assets, and it can result in bankruptcy in the near future and it will be very risky to invest in such a company.
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Let us understand the calculation of debt to asset ratio with the help of a solved example.
Solved Example
Q. Janata Store has a total asset value of 20,00,000 and total debt of 750,000. Find the debt to asset ratio.
Answer:
We know that,
Debt to Asset Ratio = Total Debt / Total Assets
Therefore,
Debt to Asset Ratio = 750,000 / 20,00,000
= 0.375 or 37.5 %
It can be understood that 37.5 % of total assets is financed by debt.
This concludes our article on the topic of Debt to Asset Ratio, which is an important topic in Class 12 Accountancy for Commerce students. For more such interesting articles, stay tuned to BYJU’S.
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