Debt to asset ratio determines the proportion of external financing used to purchase business assets. A debt to asset ratio of 0.6x indicates that 60% of the total assets are financed through external debt. It is calculated as:
Total Debt includes all external liabilities and can be calculated as:
Total Liabilities – Shareholder’s equity
Generally a debt to asset ratio of 0.50 is considered to be prudent. A higher ratio indicates the use of too much leverage and the company may have problems meeting their financial obligations. Companies with a high debt to asset ratio are referred to as ‘highly leveraged’ and are considered to be at a high risk financially. Hence, they may find it difficult to raise further debt or equity to finance any expansion plans.