The debt to total assets ratio is calculated by dividing a corporation's total liabilities by its total assets. Let's assume that a corporation has $100 million in assets, $40 million in liabilities, and $60 million in stockholders' equity. Its debt to total assets ratio will be 0.4 ($40 million of liabilities divided by $100 million of assets), or 0.4 to 1. In this example, the debt to total assets ratio tells you that 40% of the corporation's assets are financed by the creditors or debt (and therefore 60% is financed by the owners). A higher percentage indicates more leverage and more risk.
Another ratio, the debt to equity ratio, is often used instead of the debt to total assets ratio. The debt to equity ratio uses the same inputs but provides a different view. Using the information above, the debt to equity ratio will be .67 to 1 ($40 million of liabilities divided by $60 million of stockholders' equity).
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