debt-to-assets ratio

Also called the debt ratio. The debt (or liabilities)-to-assets ratio measures a company’s use of leverage: It tells you the percentage of debt used to finance assets, which can include both tangible (property, plant and equipment) and intangible (patents and trademarks) resources. On the liability side, this ratio normally includes both short- and long-term debt. The formula is total liabilities divided by total assets. A lower debt ratio indicates that a company relies less on borrowing as compared to equity for financing its assets. Generally, the lower the debt-to-assets ratio the better, but acceptable levels will vary across industries and companies. Larger, stable and more established companies can take on more debt without adding too much risk for investors. The more predictable and stable the cash flow, the easier and cheaper it is for firms to borrow. Companies in more volatile industries (like technology) may have a harder time adding debt if times get rocky.