Debt to Asset ratios determine the proportion of external financing used to purchase business assets. A ratio of 0.6x indicates that 60% of the total assets are financed through external debt. It is calculated as:

Total Debt includes all external liabilities and can be calculated as Total Liabilities – Shareholder’s equity. Generally a debt to asset ratio of 0.50 is considered to be prudent. A higher ratio indicates the use of toom much leverage and the company may have problems meeting their financial obligations. Companies with high debt to asset ratios are referred to as ‘highly leveraged’ and are considered to be at a high risk financially. Hence, they may find it difficult to raise further debt or equity to finance any expansion plan. A debt-to-asset ratio of no more than 50 percent is considered to be prudent.

Debt to Equity

The debt to equity ratio is used by all the stakeholder’s in a company (owners, creditors and financial institutions) to measure the extent to which the business is reliant on debt financing (creditor money versus owner's equity). A debt to equity ratio of 0.70x indicates that debt is 0.7 times the equity and that debt forms 41% of total capital. It is also called  a Leverage ratio and is calculates as:

Debt is considered to be risky since it has interest obligations attached to it along with certain financial constraints. High amounts of debt increase the financial risk of a company since it may not be in a position to pay off debt obligations in a case of a declining revenue or a decline in earnings before interest and taxes. A company with a high debt to equity ratio will find it very difficult to raise further capital from the market.

Profitability Ratios
Asset Ratios
Liquidity Ratios
Financial Leverage Ratios
Valuation Ratios
The Limitations of Financial Ratios

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