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Tutorial on Beginning Debt Management Financial Ratio Analysis

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Calculate the Debt to Asset Ratio
Tutorial on Beginning Debt Management Financial Ratio Analysis

Debt to Assets Ratio

Rosemary C. Peavler

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The debt to assets ratio shows you how much of your asset base is financed with debt. The key thing to remember is that if 100% of your asset base is financed with debt, you're bankrupt! You want to keep your debt to asset ratio in line with your industry. You also want to watch the historical trends in your firm and your ability to cover your interest expense on debt.

Take a look at the balance sheet. All the data you need is here and is highlighted. The debt to assets ratio is: Total Debt/Total Assets

On the balance sheet for 2007, total assets is $3,373. In order to get total debt, you have to add together current debt (current liabilities), which is $543, and long-term debt, which is $531. The calculation becomes:

Debt to Assets = $543 + $531/$3373 = 31.84%

The debt to assets ratio for XYZ Corporation is 31.84% which means that 31.84% of the firm's assets are purchased with debt. As a result, 68.16% of the firm's assets are financed with equity or investor funds.

We don't know if this is good or bad as we don't have industry data to compare it with. We can calculate the ratio for 2008. If you do that, you will see that the debt to assets ratio for 2008 is 27.79%. From 2007 to 2008, the debt to assets ratio for XYZ Corporation dropped from 31.84% to 27.79%.

A drop in the debt to assets ratio may be a good thing, but we need more information to analyze this adequately.

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