According to a recent survey, around 38% of US households have some form of debt. While this is a significant amount, some households are actually in a position where debt is an asset to them. In business, the common rule of thumb is to have more assets than debts. However, in reality, this is not the case for many businesses.
When a business borrows money from a lender, it is considered as debt and on the other hand, when you borrow something from a friend, it is considered as an asset. What would you do if you have to pay a million dollars to one of your clients but you only have $100 to your name? Of course, there are a lot of things that you can do but one of the most effective ways of solving this problem is to consolidate your debt. Debt consolidation is a program that will pay off your debts and consolidate all of your debts into one big debt.
But before making up your mind, you should calculate the debt to asset ratio. This is where our calculator comes in! Thanks to this handy tool, you can determine your company’s financial condition in no time. It also allows you to identify the risks that are associated with the company’s indebtedness. In addition to learning how the debt to asset ratio is calculated, you will also find out more about every component of the formula in this article. Without further ado, we will get straight to the point.
Debt to Asset Ratio: What Is It?
Maybe you have heard of the debt to asset ratio (DAR) but don’t know what it stands for. Well, it’s a relation between the company’s total assets and total debt. Debt is any money borrowed by the company from investors, creditors, or other sources. Assets are anything of value owned by the company and typically include cash, stocks, property, etc.
The debt to asset ratio is a measure of a company’s financial leverage, i.e., a measure of the overall financial performance or liquidity of an enterprise. It is calculated by dividing the total liabilities by the total assets. Businesses use this ratio to find out what percentage of their assets is financed by debt rather than equity.
Debt to Asset Ratio measures how much money a company owes to its creditors, or in other words how much debt it has in relation to what it owns. Actually, it measures the percentage of assets that are financed by debt.
How to Interpret It?
If the debt to asset ratio is high, this usually indicates a high financial risk. The higher the ratio, the more leveraged an organization is. As a matter of fact, the higher the ratio, the more risky the company is considered to be. A high debt to asset ratio means that the company has more liabilities than assets and may be in financial trouble. It also means a higher Return on equity (ROE) when it comes to a flourishing economy.
On the other hand, a low debt to asset ratio means that the company has more assets than liabilities and may be in good financial condition. So, every company should strive to reduce its debt to asset ratio so that there are more assets than liabilities. This can eventually improve the financial condition of your enterprise or business.
Who Needs This Metric?
Creditors, managers, and investors use this metric the most. Investors use the debt to asset ratio when evaluating whether an enterprise has sufficient finances to pay off its debts. They also use it to estimate whether the company is capable of paying the ROI (return on investments).
In the digital era, we are all aware of the fact that return on investments is essential for any business. A lot of companies are investing heavily in different marketing channels and strategies to get more leads and conversions. B2B marketers need to invest in both paid and organic search, social media, content marketing, and traditional media channels to win in their markets.
They need to make sure that they are investing enough time and money into these channels so that they can get a good ROI. It is important for B2B marketers to know how much time they should spend on each channel so that they can optimize their efforts accordingly. Some marketers might be spending too much time on one channel while neglecting another which will not give them a good ROI.
As for the creditors, they use the debt to asset ratio when looking into the potential of providing the company more money by means of additional loans. If the ratio is too high, this tells that it’s unlikely to repay existing debts, so the company should stop looking for further loans. Otherwise, it can be a high-risk investment, which may put the company’s money at higher risk.
The Formula for Debt to Asset Ratio (DAR): How to Calculate DAR?
When calculating the debt to asset ratio, use the formula below:
Debt to asset ratio = (Long-term debt + short-term debt)/Total assets * 100%
You can also use a simple version of this formula:
DAR = Total Debt / Total Assets
As you can see, this formula consists of two parameters: total debt and total assets. You can find these values in the balance sheet of your company. To estimate total debt, you need to add long-term and short-term debt (it refers to debts due within 12 months) of the company.
Once you’ve calculated the total debt (total liabilities), simply divide this figure by the total assets of the company to get DAR (debt to asset ratio). If you want to express this metric as a percentage, then multiply the result by 100%.
For example, if the Total Debt is $20,000 while the value of Total Assets is $200,000, then the debt to asset ratio would be 0.1 (20,000 / 200,000 = 0.1) or 10%. It is easy to calculate. There’s no need to do anything yourself, though. Our calculator can do the math for you and provide the result in a matter of seconds. It’s worth using!