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 debt obligations lasting more than one year. This ratio provides a general measure of the long-term financial position of a company, including its ability to meet financial requirements for outstanding loans.
Long-Term Debt to Total Assets Ratio
BREAKING DOWN Long-Term Debt To Total Assets Ratio
A year-over-year decrease in the 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 assets ratio.
Example of Long-Term Debt to Assets 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 assets ratio is $40,000/$100,000 = 0.4, or 40 percent. 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 Assets Ratio Symbolize?
If a business has a high long-term debt to assets 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 assets 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 the long-term debt to assets ratio only takes into account long-term debts, the total debt to 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 rent, utilities and loans maturing in less than 12 months. Both ratios, however, encompass 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 assets ratio includes more of a company's liabilities, this number is almost always higher than a company's long-term debt to assets ratio.