Debt to Assets Ratio

This is one of many leverage ratios used to determine the financial viability of an organization. To the extent that assets exceed liabilities, an organization generally poses less risk when applying for a loan. A lender would need to take a closer look if the ratio between assets and liabilities is closer to or above 1 to 1. The basic formula for this ratio is:

               Total Liabilities ÷ Total Assets

Signal:  Under .5 or 50% is better; over 1.0 or 100% would indicate that liabilities exceed assets, which is not desirable; upward trend may be cause for concern.

Calculation:  Total liabilities may also be divided by total income or total capital for a different emphasis.

Caveat:  This ratio is a snapshot of one moment in time and may be most reliable to observe in trend. Some portion of total assets, e.g., fixed assets, are not readily converted to cash for operating purposes, so the current ratio may be a more useful indicator for liquidity.