Long-Term Debt-to-Total-Assets Ratio: Definition And Formula

(Many of the links in this article redirect to a specific reviewed product. Your purchase of these products through affiliate links helps to generate commission for LiveWell, at no extra cost. Learn more)

Understanding Long-Term Debt-to-Total-Assets Ratio

Welcome to the world of finance! Today, we are going to explore the concept of Long-Term Debt-to-Total-Assets Ratio. If you’re curious about how a company’s long-term debt relates to its overall assets, you’ve come to the right place. So, let’s dive in and uncover what this ratio means and how it is calculated.

The Definition of Long-Term Debt-to-Total-Assets Ratio

The Long-Term Debt-to-Total-Assets Ratio is a financial metric that measures the proportion of a company’s long-term debt compared to its total assets. In simple terms, it helps to answer the question:

“What percentage of a company’s assets are financed through long-term debt?”

This ratio provides crucial insights into a company’s financial health. It helps investors, creditors, and other stakeholders understand a company’s ability to handle its long-term obligations and overall financial stability. A higher ratio suggests a higher level of financial risk, as a larger portion of the company’s assets are financed through long-term debt.

Now that we have a good grasp of what this ratio signifies, let’s take a closer look at how it is calculated.

The Formula for Calculating Long-Term Debt-to-Total-Assets Ratio

The formula for calculating the Long-Term Debt-to-Total-Assets Ratio is as follows:

Long-Term Debt-to-Total-Assets Ratio = Long-Term Debt / Total Assets

Let’s break down the components of this formula:

• Long-Term Debt: This refers to a company’s debt that is due over a period longer than one year. Examples of long-term debt include bonds, mortgages, and long-term loans.
• Total Assets: This refers to the total value of a company’s assets, including both tangible and intangible assets. Tangible assets are physical assets like buildings and equipment, while intangible assets include patents, trademarks, and goodwill.

By dividing a company’s long-term debt by its total assets, we arrive at the Long-Term Debt-to-Total-Assets Ratio. This ratio is usually expressed as a percentage.

What Does the Long-Term Debt-to-Total-Assets Ratio Tell Us?

The Long-Term Debt-to-Total-Assets Ratio provides valuable information about a company’s financial risk, stability, and its ability to repay its long-term debt. Here’s what different values of this ratio can indicate:

• Low Ratio (0% – 30%): A low ratio suggests that a company has a smaller proportion of its assets financed through long-term debt. This indicates a lower level of financial risk and a higher ability for the company to repay its debt obligations.
• Medium Ratio (30% – 70%): A medium ratio suggests that a company has a moderate level of its assets financed through long-term debt. This indicates a moderate level of financial risk, and the ability to manage long-term debt may vary depending on other factors such as industry norms and profitability.
• High Ratio (70% – 100%): A high ratio suggests that a company has a significant portion of its assets financed through long-term debt. This indicates a higher level of financial risk, as a larger proportion of the company’s assets rely on debt financing. It may also indicate potential difficulties in meeting long-term debt obligations.

It’s important to note that acceptable ranges for this ratio may differ across industries. For example, capital-intensive industries like utilities or manufacturing may have higher long-term debt-to-total-assets ratios compared to service-based industries.

So there you have it! The Long-Term Debt-to-Total-Assets Ratio enables us to gauge a company’s financial risk, stability, and its ability to pay off its long-term liabilities. Keep in mind that this ratio should be analyzed in conjunction with other financial and industry-specific factors to obtain a comprehensive understanding of a company’s financial health.

Now that you understand the concept and calculation method for the Long-Term Debt-to-Total-Assets Ratio, go ahead and put your financial analysis skills to the test!