Investing for Beginners .EU, investing

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Debt to Asset Ratio

 

Debt to asset ratio (also called as D/A ratio, Debt/Asset) measures how big is company’s debt compared to its assets. Debt to asset ratio is very similar to debt to equity (D/E) ratio but normally is lower because assets are always higher than equity. 

 

Higher debt to asset ratio means higher financial leverage and higher credit risk of the company. If debt to asset ratio is very high, it may indicate that company can face solvency risk. 

 

D/A calculation


(1) D/A = Total liabilities / Total assets 

 

(2) D/A = Financial debt / Total assets

 

** You may multiply the result by 100%. All financial data can be found in company’s balance sheet. If company’s business is seasonal then annual average should be used.

 

Ratio interpretation

 

Debt to asset ratio can be higher or lower depending on the sector. The more cyclical sector is the more careful should be the management of the company trying to maintain lower D/A ratio. Theoretically debt to asset ratio cannot exceed value of 1, and if debt to asset would be higher than 1 it would mean that company’s equity is negative and such company naturally should go bankrupt. 

 

Normal debt to asset ratio should be between 0.2 and 0.5 but to measure real financial health of the company more financial analysis ratios should be calculated:

 

 



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