What is the 'Long Term Debt To Total Assets Ratio'
The long term debt to total assets ratio is a measurement representing the percentage of a corporation's assets financed with loans or other financial obligations lasting more than one year. The ratio provides a general measure of the long-term financial position of a company, including its ability to meet financial requirements for outstanding loans.
BREAKING DOWN 'Long Term Debt To Total Assets Ratio'A year-over-year decrease in long term debt to total assets ratio may suggest a company is progressively becoming less dependent on debt to grow its business. The calculation for the long-term debt to total assets ratio is: long-term debt / total assets = long-term debt to total asset ratio.
Example of Long-Term Debt to Asset Ratio
For example, if a company has $100,000 in total assets with $40,000 in long-term debt, its long-term debt to total asset ratio is $40,000/$100,000 = 0.4 or 40%. This ratio indicates that the company has 40 cents of long-term debt for each dollar it has in assets. In order to compare the overall leverage position of the company, investors look at comparable firms and the historical changes in this ratio.
What Does the Long-Term Debt to Asset Ratio Symbolize?
If a business has a high long-term debt to asset ratio, it suggests the business has a relatively high degree of risk, and eventually, it may not be able to repay its debts. This makes lenders more skeptical about loaning the business money and investors more leery about buying shares. In contrast, if a business has a low long-term debt to asset ratio, it can signify the relative strength of the business. However, the assertions an analyst can make based on this ratio vary based on the company's industry as well as other factors, and for this reason, analysts tend to compare these numbers between companies from the same industry.
Difference Between Long-Term Debt to Asset and Total Debt to Asset Ratios
While long-term debt to asset ratio only takes into account long-term debts, the total debt to total asset ratio includes all debts. This ratio takes into account both long-term debts, such as mortgages and securities, and current debts such as rent, utilities and short-term loans. Both ratios, however, take into account all of a business's assets including tangible assets such as equipment and inventory and intangible assets such as accounts receivables. Because the total debt to asset ratio includes more of a company's liabilities, this ratio is almost always higher than a company's long-term debt to asset ratio.