Long-Term Debt-to-Total-Assets Ratio
What Is the Long-Term Debt-to-Total-Assets Ratio?
The long-term debt-to-total-assets ratio is a measurement addressing the percentage of a corporation's assets financed with long-term debt, which incorporates loans or other debt obligations enduring more than one year. This ratio gives a general measure of the long-term financial position of a company, including its ability to meet its [financial obligations](/financial-commitment ratio-for) for outstanding loans.
The Formula for the Long-Term Debt-to-Total-Assets Ratio
What Does the Long-Term Debt-to-Total-Assets Ratio Tell You?
A year-over-year decline in a company's long-term debt-to-total-assets ratio might propose that it is turning out to be logically less dependent on debt to develop its business. Albeit a ratio result that is viewed as indicative of a "sound" company changes by industry, generally talking, a ratio consequence of under 0.5 is viewed as great.
Illustration of Long-Term Debt to Assets Ratio
In the event that a company has $100,000 in total assets with $40,000 in long-term debt, its long-term debt-to-total-assets ratio is $40,000/$100,000 = 0.4, or 40%. This ratio demonstrates that the company has 40 pennies of long-term debt for every dollar it has in assets. To compare the overall leverage position of the company, investors take a gander at similar ratio for comparable firms, the industry as a whole, and the company's own historical changes in this ratio.
On the off chance that a business has a high long-term debt-to-assets ratio, it proposes the business has a relatively high degree of risk, and ultimately, it will most likely be unable to repay its debts. This makes lenders more distrustful about advancing the business money and investors more hesitant about buying shares.
Conversely, on the off chance that a business has a low long-term debt-to-assets ratio, it can mean the relative strength of the business. Notwithstanding, the declarations an analyst can cause in light of this ratio to fluctuate in view of the company's industry as well as different factors, and consequently, analysts will generally compare these numbers between companies from a similar industry.
The Difference Between Long-Term Debt-to-Asset and Total Debt-to-Asset Ratios
While the long-term debt to assets ratio just considers long-term debts, the total-debt-to-total-assets ratio incorporates all debts. This measure considers both long-term debts, like mortgages and securities, and current or short-term debts like rent, utilities, and loans developing in under 12 months.
The two ratios, nonetheless, envelop a business' all's assets, including unmistakable assets, for example, equipment and inventory and elusive assets like accounts receivables. Since the total debt-to-assets ratio incorporates even more a company's liabilities, this number is quite often higher than a company's long-term debt to assets ratio.
Highlights
- Recalculating the ratio over several time spans can uncover trends in a company's decision to finance assets with debt rather than equity and its ability to repay its debt over time.
- The long-term debt-to-total-assets ratio is a coverage or solvency ratio used to compute the amount of a company's leverage.
- The ratio result shows the percentage of a company's assets it would need to liquidate to repay its long-term debt.
