Long-Term Debt to Total Assets Ratio (2024)

FAQs

Long-Term Debt to Total Assets Ratio? ›

The long-term debt

What is a good long-term debt ratio? A long-term debt ratio of 0.5 or less is considered a good definition to indicate the safety and security of a business.

What counts as a good debt ratio will depend on the nature of the business and its industry. Generally speaking, a debt-to-equity or debt-to-assets ratio below 1.0 would be seen as relatively safe, whereas ratios of 2.0 or higher would be considered risky.

The higher a company's debt-to-total assets ratio, the more it is said to be leveraged. Highly leveraged companies carry more risk of missing debt payments should their revenues decline, and it is harder to raise new debt to get through a downturn.

To calculate long-term debt to equity ratio, divide long-term debt by shareholders' equity. As we covered above, shareholders' equity is total assets minus total liabilities.

In general, many investors look for a company to have a debt ratio between 0.3 and 0.6. From a pure risk perspective, debt ratios of 0.4 or lower are considered better, while a debt ratio of 0.6 or higher makes it more difficult to borrow money.

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.

The ideal debt to asset ratio can be maximum 50%. It is advisable not to have the debt (loans, credit cards) go beyond 50% of your total assets.

Rule of thumb: Most lenders say that your total debt payments should not be more than 37% - 40% of your gross annual income.

A debt ratio below 0.5 is typically considered good, as it signifies that debt represents less than half of total assets. A debt ratio of 0.75 suggests a relatively high level of financial leverage, with debt constituting 75% of total assets.

How to fix debt to asset ratio? ›

To bring your Debt to Assets Ratio into range, assets have to increase or debt has to decrease. Increasing assets will often require a loan (more debt), new investors, or more importantly, retained earnings. New investors come with strings attached, but can often provide immediate improvement in Debt to Assets.

Long Term Debt is classified as a non-current liability on the balance sheet, which simply means it is due in more than 12 months' time.

Lenders prefer bad debt to sales ratios under 0.4 or 40%. However, most companies prefer to have much lower numbers than this. Unless you have no bad debt, there is room to improve.

The lower value of the debt-to-equity ratio is considered favourable, as it indicates a reduced risk. So, if the ratio of debt to equity is 0.5, that means that the company has half its liabilities because it has equity.

A company's long-term-debt-to-total-asset ratio measures its leverage and acts as a metric for determining its solvency. The ratio is calculated by dividing total long-term debt (i.e. debt with more than a year to maturity) by total assets.

What percentage of net worth should be debt? Debt to net worth ratio of less than 100% is considered a good debt level. A higher percentage goes against common wisdom that suggests corporations should limit their debt below a certain amount, usually 30%.

What is a good long-term debt to total capitalization ratio? A good long-term debt to total capitalization ratio is anything below 1.0. Ratios above 1.0 suggest the company may be "over-leveraged" and at risk of defaulting on its loans.

In the retail sector, an asset turnover ratio of 2.5 or more could be considered good, while a company in the utilities sector is more likely to aim for an asset turnover ratio that's between 0.25 and 0.5.

A good current ratio is between 1.2 to 2, which means that the business has 2 times more current assets than liabilities to covers its debts. A current ratio below 1 means that the company doesn't have enough liquid assets to cover its short-term liabilities.