Debt to Asset Ratio Definition and Explanation

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Quick Definition

Measures debt in relation to assets in an attempt to gauge the amount of risk.

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Debt to Asset Ratio Formula

Explanation of Debt to Asset Ratio

The Debt to Asset Ratio measures the percentage of the company’s Total Assets that are financed with debt (Total Liabilities). This ratio basically looks at what debt the company owes, and compares that debt to what assets the company owns.

Importance of Debt to Asset Ratio

The lower the Debt to Asset Ratio, the better, as companies with high amounts of debt introduce more risk. You certainly want to look very hard at companies that have more Total Liabilities than Total Assets, as this is a precarious position for a company to be in.

Depending on the industry of the company, you might expect the company to have two or three times as many assets as liabilities. Anything less than this might be a signal that the company is running into trouble.