## Definition of Debt to Total Assets Ratio

The debt to total assets ratio is an indicator of a company's financial leverage. It tells you the percentage of a company's total assets that were financed by creditors. In other words, it is the *total* amount of a company's liabilities divided by the *total* amount of the company's assets.

Note: *Debt* includes more than loans and bonds payable. Debt is the total amount of all liabilities (current liabilities and long-term liabilities).

## Example of Debt to Total Assets Ratio

Let's assume that a corporation has $100 million in total assets, $40 million in total liabilities, and $60 million in stockholders' equity. This corporation's *debt to total assets ratio* is 0.4 ($40 million of liabilities divided by $100 million of assets), 0.4 to 1, or 40%. This indicates 40% of the corporation's assets are being financed by the creditors, and the owners are providing 60% of the assets' cost. Generally, the higher the debt to total assets ratio, the greater the financial leverage and the greater the risk.

## How To Be Used

As with all financial ratios, it is best for a company to compare its debt to total assets ratio to:

- its ratio at an earlier date
- its targeted ratio...its goal
- the ratios at companies in the same industry