Long-Term Debt-to-Total-Assets Ratio Definition and Formula
The long-term debt-to-total-assets ratio represents the percentage of a corporation’s assets financed with long-term debt. It provides a general measure of the company’s long-term financial position and ability to meet financial obligations. The formula for this ratio is: LTD/TA = Long-Term Debt/Total Assets.
A year-over-year decrease in the ratio may suggest that the company is becoming less dependent on debt to grow its business. A ratio result of less than 0.5 is generally considered good.
Key takeaways:
– The ratio is used to calculate the amount of a company’s leverage.
– It shows the percentage of a company’s assets that would need to be liquidated to repay long-term debt.
– Analyzing the ratio over time can reveal trends in a company’s choice to finance assets with debt and its ability to repay debt.
Example:
If a company has $100,000 in total assets and $40,000 in long-term debt, its long-term debt-to-total-assets ratio is 40%. This means the company has 40 cents of long-term debt for each dollar of assets. Analysts compare this ratio between companies in the same industry to evaluate leverage position.
A high long-term debt-to-assets ratio suggests a higher degree of risk and potential difficulty in repaying debt. On the other hand, a low ratio indicates relative strength. However, the implications of the ratio vary based on the industry.
The total-debt-to-total-assets ratio includes all debts, both long-term and short-term, while the long-term debt-to-assets ratio only considers long-term debts. The total debt-to-assets ratio is usually higher due to the inclusion of more liabilities.
In summary, the long-term debt-to-total-assets ratio is a valuable measure of a company’s leverage and financial position. Analyzing this ratio over time can provide insights into a company’s debt management.
