UK Accounting Glossary
The debt/asset ratio measures the ratio of the company’s assets that is financed by non-owners. The debt/asset ratio is computed by dividing total liabilities by total assets. To focus solely on the more permanent capital of the term, the debt/asset ratio can also be calculated by dividing long-term liabilities (obligations not due for one year or longer) by total assets. However calculated, the debt/asset ratio varies markedly by industry: a company in a highly capital-intensive sector (like steel) usually has a substantially greater debt/asset ratio than a firm in a business with low capital needs (like software). Excluding industry-specific factors, a high debt/asset ratio may indicate a company that can’t pay its bills. The increasing cost of servicing debt further strains the company’s finances, and the accelerating debt/asset ratio foreshadows major problems. But a high debt/asset ratio can also point to a rapidly expanding firm that is using debt successfully to expand its business. If the company can produce returns on borrowed capital that exceed the cost of those funds, it can continue to successfully expand its debt/asset ratio.
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This glossary post was last updated: 7th February 2020.