Definition
The term total debt to total assets ratio refers to a measure of the leverage a company has used in the past to acquire assets. The total debt to total assets ratio is considered a coverage metric, and it's one that provides a relatively broad measure of a company's ability to meet its financial obligations as they come due.
Calculation
Total Debt to Total Assets = Total Debt / Total Assets
Where:
Total Debt = the total of both short-term and long-term debt.
Total Assets = the total of both tangible and intangible assets.
Note: The calculation of this metric does not include the company's short-term and long-term liabilities.
Explanation
Also referred to as coverage ratios, liquidity ratios allow the investor-analyst, as well as creditors, to understand if a company may have difficulty meeting its debt obligations; thereby increasing the company's perceived, or real, financial risk.
As is the case with many ratios, insights are more meaningful if the metric is tracked over time. The total debt to total assets ratio is also a very broad measure of leverage. As such, it's one that's oftentimes used when benchmarking performance against other companies within an industry. This metric is also of particular interest to lenders and creditors, since it allows them to understand if a company runs the risk of breaking a debt covenant, and being forced into bankruptcy.
One of the criticisms of the total debt to total assets ratio is its inclusion of both intangible as well as tangible assets, since the former (intangible assets) can vary considerably in quality from company to company. It's also a metric that relies solely on the balance sheet; thereby ignoring the company's ability to generate profits to meet its debt obligations.
Example
Company A's balance sheet revealed it had $15,000,000 in long-term debt, along with $3,000,000 in short-term debt. Company A also has $35,000,000 in tangible assets and $2,000,000 in intangible assets. The total debt to total assets ratio for Company A is calculated as follows:
= ($15,000,000 + $3,000,000) / ($35,000,000 + $2,000,000) = $18,000,000 / $37,000,000, or 48.6%
Related Terms
balance sheet, assets, long-term debt, tangible assets, intangible assets, liquidity ratio, accumulated depreciation to fixed assets ratio, capital to labor ratio
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