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Simple English definitions for legal terms
debt-to-total-assets ratio
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A quick definition of debt-to-total-assets ratio:
Debt-to-Total-Assets Ratio: This is a way to measure how much a company owes compared to how much it owns. It is calculated by dividing the total amount of money a company owes (both long-term and short-term) by the total value of everything the company owns. A low debt-to-total-assets ratio means the company has been careful with its borrowing and is in a good position to borrow more in the future if needed.
A more thorough explanation:
The debt-to-total-assets ratio is a financial metric used to measure a corporation's total long-term and short-term liabilities divided by the firm's total assets. This ratio is also known as the debt ratio.
A low debt ratio indicates conservative financing, which means that the company has a reduced risk of defaulting on its loans. This also means that the company has an enhanced ability to borrow in the future.
Let's say that Company A has $500,000 in total assets and $100,000 in total liabilities. The debt-to-total-assets ratio for Company A would be:
Debt-to-total-assets ratio = Total liabilities / Total assets
Debt-to-total-assets ratio = $100,000 / $500,000
Debt-to-total-assets ratio = 0.2 or 20%
This means that 20% of Company A's assets are financed by debt.
Another example is Company B, which has $1,000,000 in total assets and $800,000 in total liabilities. The debt-to-total-assets ratio for Company B would be:
Debt-to-total-assets ratio = Total liabilities / Total assets
Debt-to-total-assets ratio = $800,000 / $1,000,000
Debt-to-total-assets ratio = 0.8 or 80%
This means that 80% of Company B's assets are financed by debt, which indicates that the company has a higher risk of defaulting on its loans.
In summary, the debt-to-total-assets ratio is a useful financial metric that helps investors and creditors assess a company's financial health and risk level.