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In this case, the ratio shows how much of a companys operations are funded by debt.
How To Calculate Total Debt-To-Total Assets Ratio
The total-debt-to-total-assets ratio is straightforward.
Simply divide a companys total funded debt by its total assets.
To express the ratio as a percentage, which is fairly common, multiply the result by 100.
As the name implies, a companys total debt includes all of its obligations, both short-term and long-term.
Similarly, total assets include bothcurrent and non-current assets.
Therefore, most companies except the very smallest need to hire accountants.
You would then divide the $40 million in total liabilities by the $100 million in total assets.
That will give the company a total-debt-to-total-assets ratio of 0.40, or 40% when multiplied by 100.
To some degree, this can be an effective strategy.
The same is true for companies that need to spend a lot on infrastructure to generate revenue.
What Is a Good Debt-to-Assets Ratio?
Theres no such thing as a good debt-to-assets ratio in an absolute sense, only a relative one.
This doesnt necessarily mean they are bad companies.
In fact, a company with a high debt-to-assets ratio might still be performing quite well.
But again, this can vary dramatically from industry to industry and throughvarious economic times.
These can be important when determining if a company is worth an investment.
Remember that a high debt-to-assets ratio isnt necessarily a bad thing.
Its also important to note that a companys debt-to-assets ratio is not always entirely its own responsibility.
Macroeconomic factors can cause a company to temporarily take on more debt.
Other times, internal, company-specific events may temporarilyor permanentlyraise or lower a debt-to-assets ratio.
Utilities
In this example, NextEra Energy has a much higher-than-average ratio for the utility industry.
Information Technology
As compared with the utility industry, all of theseinformation technology companieshave low debt-to-assets ratios.
Theres still a wide variation within this sector, though.
Takeaway
Finding and working with a financial advisor is a great idea.
A financial advisor will help keep track of your finances and assist you in attaining your financial goals.
Get to know your Financial Advisor options today for Free!
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