How to calculate debt-to-assets ratio, step by step
The debt-to-assets ratio is one division that answers one question: what share of everything a business owns is financed by debt? A business owner who knows the answer can see how much of the business is borrowed and how much is owned outright. The calculation is the total debt divided by the total assets — two numbers from any balance sheet, divided. The answer is a percent: a ratio of 40.00% means 40 cents of every asset dollar is financed by debt, and the rest is owned outright.
The formula is debt-to-assets ratio = total debt ÷ total assets. The total debt is everything the business owes — loans, bonds, accounts payable and any other liability, all added up. The total assets are everything the business owns — cash, inventory, equipment, property and any other asset, all added up. Both figures are in the same currency, on the same balance sheet, or the ratio is wrong before it starts.
The worked example, line by line. Step 1 — the total debt: $400,000. Step 2 — the total assets: $1,000,000. Step 3 — the division: $400,000.00 ÷ $1,000,000.00 = 40.00%. Step 4 — the implied equity: $1,000,000.00 − $400,000.00 = $600,000.00. Step 5 — the meaning: 40 cents of every asset dollar is financed by debt. Work it yourself in the debt-to-assets ratio calculator.
What the number means
A ratio of 40.00% means 40 cents of every asset dollar is financed by debt, so the debt finances two-fifths of everything the business owns and the owners fund three-fifths outright. A lower ratio means less borrowing: the debt finances less of the business, and a fall in asset values still leaves the owners with equity. A higher ratio means more borrowing: the debt finances more of the business, and a fall in asset values can leave the business owing more than it owns. The ratio on its own never says whether 40.00% is comfortable or tight — that depends on the lender and on how steady the business's income is. A business with steady income can run at a higher ratio because the payments are easy to service, and a business with lumpy income can struggle at the same ratio. What the ratio does say, plainly, is how much of everything the business owns is financed by debt.
What moves the debt-to-assets ratio
Two things move the ratio: the debt and the assets. Raise the debt and the ratio rises, because a bigger debt finances more of the same assets: with the assets held at $1,000,000, debt of $200,000 puts the ratio at 20.00%, and debt of $750,000 puts it at 75.00% — the smallest debt for the ratio to reach 50.00% is $500,000. Cut the debt — pay a loan down — and the ratio falls. Raise the total assets and the ratio falls, because the same debt is now a smaller share of a bigger asset base: the same $400,000 of debt against $2,000,000 of total assets is a ratio of only 20.00%. Cut the assets — a falling market — and the ratio rises, because the same debt is now a bigger share of a smaller asset base.
Leverage benchmarks
Leverage benchmarks, as general guidance only: below 40% is usually called conservative — most of the business is owned outright, and lenders rarely worry. From 40% to 60% is moderate — a normal working level for many businesses, where the debt is real but the owners still hold the larger share. Above 60% is highly leveraged — the debt finances most of everything the business owns, and a fall in asset values can leave the business owing more than it owns. These are rules of thumb, not lender rules: a utility with steady cash flow can run higher than a startup with lumpy income, and what counts as comfortable depends on the industry, the lender and the business's own cash flow.
When the ratio is undefined
If the total debt and the total assets are both $0, the ratio is undefined — the total assets are $0, and dividing by $0 has no answer. A business with no assets at all has no ratio to calculate, only a warning. If the total debt is $0, the ratio is 0.00% — a real figure, not undefined: nothing of the business is financed by debt. If the total assets are $0 while the debt is not, the ratio is undefined too — there is nothing to divide by, so there is no share to report.
Common mistakes
The first mistake is confusing this ratio with the debt-to-equity ratio — that one divides the debt by the equity, the leverage against what the owners put in, not against everything the business owns. The same $400,000 of debt and $1,000,000 of total assets give an implied equity of $600,000.00, and mixing the two up turns the asset base into the equity base. The second is confusing it with the equity ratio — that one is the owners' share, the complement of this ratio. The third is using the wrong debt — only part of the debt, or debt from a different date than the assets — and the ratio is wrong before it starts. The fourth is forgetting the ratio moves — a falling asset value pushes the ratio up without a dollar of debt being added. Work it out in the debt-to-assets ratio calculator, and check the debt-to-equity ratio calculator and the equity ratio calculator before you decide what the leverage means.