What is the ratio of long-term debt to total assets?
The ratio of long-term debt to total assets is a measure of the percentage of a company’s assets financed by long-term debt, which includes loans or other debt securities with a term of more than one year.. This ratio provides a general measure of the long-term financial condition of a business, including its ability to meet its financial obligations for outstanding loans.
The long-term debt / total assets ratio formula
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Long-term debt to total assets ratio
What does the ratio of long-term debt to total assets tell you?
A year-over-year decrease in the ratio of long-term debt to total assets of a business may suggest that it becomes less and less dependent on debt to grow its business. Although a ratio result considered as indicative of a “healthy” company varies by industry, in general, a ratio result less than 0.5 is considered good.
Key points to remember
- The ratio of long-term debt to total assets is a coverage or solvency ratio used to calculate the amount of a company’s debt.
- The result of the ratio shows the percentage of the assets of a company that it would have to liquidate to repay its long-term debt.
- Recalculating the ratio over several periods can reveal trends in a firm’s choice to finance assets with debt rather than equity and its ability to repay debt over time.
Example of long-term debt / asset ratio
If a business has total assets of $ 100,000 and long-term debt of $ 40,000, its long-term debt / total assets ratio is $ 40,000 / $ 100,000 = 0.4, or 40%. This ratio indicates that the company has 40 cents of long-term debt for every dollar of assets. In order to compare the overall leverage position of the company, investors examine the same ratio for comparable companies, the industry as a whole and the company’s own historical changes in this ratio.
If a company has a high long-term debt ratio, this suggests that the company has a relatively high degree of risk and may not be able to repay its debts. This makes lenders more skeptical about lending business money and investors more wary of buying stocks.
On the other hand, if a company has a low long-term debt ratio, it can mean the relative strength of the company. However, the claims that an analyst can make based on this ratio vary depending on the industry of the company as well as other factors, and for this reason, analysts tend to compare these figures between companies. from the same industry.
The difference between debt-to-long-term and total debt-to-asset ratios
While the long-term debt to assets ratio only takes into account long-term debts, the total debt / total assets ratio includes all debts. This measure takes into account both long-term debts, such as mortgages and securities, and current or short-term debts such as rents, utilities and loans maturing in less than 12 months.
However, both ratios include all of the assets of a business, including tangible assets such as equipment and inventory and intangible assets such as accounts receivable. Since the total debt-to-assets ratio includes more of a company’s liabilities, this number is almost always greater than a company’s long-term debt ratio.