Debt to Assets

April 13, 2006

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This ratio measures the percentage of a business's assets that are financed with debt, and can be calculated using the following formula:

Total Debt

Total Assets

This ratio measures the percentage of assets financed by creditors, compared to the percentage that have been financed by the business owners. Historically, a debt-to-asset ratio of no more than 50 percent has been considered prudent. A higher ratio indicates a possible overuse of leverage, and it may indicate potential problems meeting the debt payments.

Improving this ratio means taking steps to either increase the value of your assets, or to pay off debt. For example, you might explore whether inventory or other assets can be given a higher value. If you go the route of paying off debt, you'll also improve your current ratio and debt-to-equity ratio.