
Total-Debt-to-Total-Assets Ratio
Let's examine the total-debt-to total-assets ratio for three companies — The Walt Disney Company, Chipotle Mexican Grill, Inc., and Sears Holdings Corporation — for the fiscal year (FY) ended 2017 (December 31, 2016, for Chipotle). Debt to Assets Comparison _(data in millions)_ **Chipotle** Total Assets Total Debt to Assets Debt to Assets Comparison From the example above, Sears is shown to have a much higher degree of leverage than Disney and Chipotle and, therefore, a lower degree of financial flexibility. TD/TA \= Short-Term Debt \+ Long-Term Debt Total Assets \\begin{aligned} &\\text{TD/TA} = \\frac{ \\text{Short-Term Debt} + \\text{Long-Term Debt} }{ \\text{Total Assets} } \\\\ \\end{aligned} TD/TA\=Total AssetsShort-Term Debt+Long-Term Debt Total-debt-to-total-assets is a measure of the company's assets that are financed by debt rather than equity. If the acquisition does not perform as expected and results in the entire goodwill asset being written off, the ratio of total debt to total assets (which would now be $95.8 billion - $20 billion = $75.8 billion) would be 0.67. As with all other ratios, the trend of the total-debt-to-total-assets ratio should be evaluated over time. The total-debt-to-total-assets ratio analyzes a company's balance sheet by including long-term and short-term debt (borrowings maturing within one year), as well as all assets — both tangible and intangible, such as goodwill.

What Is the Total-Debt-to-Total-Assets Ratio?
Total-debt-to-total-assets is a leverage ratio that defines the total amount of debt relative to assets owned by a company. Using this metric, analysts can compare one company's leverage with that of other companies in the same industry. This information can reflect how financially stable a company is. The higher the ratio, the higher the degree of leverage (DoL) and, consequently, the higher the risk of investing in that company.



Understanding the Total-Debt-to-Total-Assets Ratio
The total-debt-to-total-assets ratio analyzes a company's balance sheet by including long-term and short-term debt (borrowings maturing within one year), as well as all assets — both tangible and intangible, such as goodwill. It indicates how much debt is used to carry a firm's assets, and how those assets might be used to service debt. It therefore measures a firm's degree of leverage.
Debt servicing payments must be made under all circumstances, otherwise the company would breach its debt covenants and run the risk of being forced into bankruptcy by creditors. While other liabilities such as accounts payable and long-term leases can be negotiated to some extent, there is very little “wiggle room” with debt covenants.
A company with a high degree of leverage may thus find it more difficult to stay afloat during a recession than one with low leverage. It should be noted that the total debt measure does not include short-term liabilities such as accounts payable and long-term liabilities such as capital leases and pension plan obligations.
The Formula for Total-Debt-to-Total-Assets Is
TD/TA = Short-Term Debt + Long-Term Debt Total Assets \begin{aligned} &\text{TD/TA} = \frac{ \text{Short-Term Debt} + \text{Long-Term Debt} }{ \text{Total Assets} } \\ \end{aligned} TD/TA=Total AssetsShort-Term Debt+Long-Term Debt
What Does the Total-Debt-to-Total-Assets Ratio Tell You?
Total-debt-to-total-assets is a measure of the company's assets that are financed by debt rather than equity. When calculated over a number of years, this leverage ratio shows how a company has grown and acquired its assets as a function of time.
Investors use the ratio to evaluate whether the company has enough funds to meet its current debt obligations and to assess whether the company can pay a return on its investment. Creditors use the ratio to see how much debt the company already has and whether the company can repay its existing debt. This will determine whether additional loans will be extended to the firm.
A ratio greater than 1 shows that a considerable portion of the assets is funded by debt. In other words, the company has more liabilities than assets. A high ratio also indicates that a company may be putting itself at risk of defaulting on its loans if interest rates were to rise suddenly.
A ratio below 1, meanwhile, indicates that a greater portion of a company's assets is funded by equity.
Real World Example of the Total-Debt-to-Total-Assets Ratio
Let's examine the total-debt-to total-assets ratio for three companies — The Walt Disney Company, Chipotle Mexican Grill, Inc., and Sears Holdings Corporation — for the fiscal year (FY) ended 2017 (December 31, 2016, for Chipotle).
Debt to Assets Comparison
(data in millions)
Chipotle
Total Assets
Total Debt to Assets
Debt to Assets Comparison
From the example above, Sears is shown to have a much higher degree of leverage than Disney and Chipotle and, therefore, a lower degree of financial flexibility. With more than $13 billion in total debt, it is easy to understand why Sears was forced to declare Chapter 11 bankruptcy in October 2018. Investors and creditors considered Sears a risky company to invest in and loan to due to its very high leverage.
Limitations of the Total-Debt-to-Total-Assets Ratio
One shortcoming of the total-debt-to-total-assets ratio is that it does not provide any indication of asset quality since it lumps all tangible and intangible assets together. For example, assume from the example above that Disney took on $50.8 billion of long-term debt to acquire a competitor and booked $20 billion as a goodwill intangible asset for this acquisition.
If the acquisition does not perform as expected and results in the entire goodwill asset being written off, the ratio of total debt to total assets (which would now be $95.8 billion - $20 billion = $75.8 billion) would be 0.67.
As with all other ratios, the trend of the total-debt-to-total-assets ratio should be evaluated over time. This will help assess whether the company’s financial risk profile is improving or deteriorating. For example, an increasing trend indicates that a business is unwilling or unable to pay down its debt, which could indicate a default in the future.
Related terms:
Accounts Payable (AP)
"Accounts payable" (AP) refers to an account within the general ledger representing a company's obligation to pay off a short-term debt to its creditors or suppliers. read more
Asset
An asset is a resource with economic value that an individual or corporation owns or controls with the expectation that it will provide a future benefit. read more
Balance Sheet : Formula & Examples
A balance sheet is a financial statement that reports a company's assets, liabilities and shareholder equity at a specific point in time. read more
Capital Lease
A capital lease is a contract entitling a renter the temporary use of an asset and, in accounting terms, has asset ownership characteristics. read more
Cash Asset Ratio
The cash asset ratio is the current value of marketable securities and cash, divided by the company's current liabilities. read more
Cash Ratio
The cash ratio—total cash and cash equivalents divided by current liabilities—measures a company's ability to repay its short-term debt. read more
Covenant
A covenant is a commitment in a bond or other formal debt agreement that certain activities will or will not be undertaken. read more
Coverage Ratio
Coverage ratios measure a company's ability to service its debt and meet its financial obligations. read more
Creditor
A creditor is an entity that extends credit by giving another entity permission to borrow money if it is paid back at a later date. read more
Current Ratio
The current ratio is a liquidity ratio that measures a company's ability to cover its short-term obligations with its current assets. read more