Debt to Total Assets Ratio

The debt to total assets ratio measures the proportion of the company’s total assets that are financed by creditors, an indication of the firm’s long-term debt repayment ability.

Lenders and other creditors would like the debt to total assets ratio to be as low as possible because a low ratio indicates a lower risk of default on the debt the company owes. Therefore, the higher the debt to total assets ratio is, the higher the company’s cost of debt will be, because lenders and creditors will demand compensation for the increased risk they are bearing.

The numerator of the debt to total assets ratio includes all liabilities, including current liabilities such as accounts payable despite the fact that accounts payable probably do not require interest or principal payments. Including all liabilities makes the Debt to Total Assets ratio more conservative than ratios that include only long-term debt in the numerator.