Debt to Asset Ratio is a type of Solvency Ratio that determines the contribution of Debt in a company’s Total Asset. It is a measure of how many parts of the total asset of a company is in the form of Debt. Creditor's contribution is termed as Debt.
$$Debt\quad to\quad Capital\quad Ratio=\frac { Total\quad Debt }{ Total\quad Asset }$$ Total Debt = Long Term Debt + Current or Short-Term Debt;
hence, total debt includes all debts/liability payable within a year and payable in the long-term. Where,
$$Debt\quad to\quad Capital\quad Ratio=\frac { Total\quad Debt }{ Total\quad Asset }$$ Total Debt = Long Term Debt + Current or Short-Term Debt;
hence, total debt includes all debts/liability payable within a year and payable in the long-term. Where,
- And Total Asset = Total Equity + Total Debt OR Sum of all Assets (Current, Non-Current, Fixed); total capital implies shareholders as well as creditors contribution.
Significance and Interpretation
- Debt Asset Ratio = 0.5: This implies that the total assets are comprised of 50% of the debt.
- Debt Asset Ratio <0.5: This implies that the total assets are comprised of less than 50% of the debt.
- Debt Asset Ratio > 0.5: This implies that the total assets are comprised of more than 50% of the debt. This situation is not considered to be good and the company faces issues in case of a rise in interest rate.
- The ideal Debt Asset Ratio < 0.5, which indicates that the company has less than half of the assets as debt (both current as well as non-current). However, it must be noted that this limit may shift depending upon the regulatory reforms and/or type of business.
- A low Debt Asset Ratio is beneficial for lenders to the company, wherein a high Debt Asset Ratio is beneficial to the company for trading in Equities.
Examples
Example 1:
M/S ABC Ltd. reported total debts worth ₹450 Crores and total assets as ₹650 Crores, find the proprietary ratio of M/S ABC Ltd.
Solution:
Total Assets = ₹620 Crore; Total Debt = ₹450 Crore
Hence, Debt Asset Ratio = Total Debt / Total Asset
⇨ 450/650
⇨ 9/13 or 0.69
Example 2:
M/S XYZ Ltd.’s Balance Sheet as on 31-March-2012 is given below, calculate the Debt to Asset Ratio for M/S XYZ.Solution:
Total Debt = Long Term Borrowings + Current Liabilities
⇨ 150000
Total Asset = Fixed Assets + Non- Current investments + Current Assets
Total Asset = Fixed Assets + Non- Current investments + Current Assets
⇨ 850000
Debt Asset Ratio = Total Debt / Total Asset
Debt Asset Ratio = Total Debt / Total Asset
⇨ 150000 / 850000
⇨ 3 / 17
Hence, Debt Asset Ratio = 3/17 or 0.176
Hence, Debt Asset Ratio = 3/17 or 0.176
