The long-term debt-to-total-assets ratio is a crucial metric representing the percentage of a corporation’s assets financed with long-term debt, encompassing any loans or other debt obligations lasting more than a year. This ratio offers a general measure of a company’s long-term financial position and its ability to meet financial obligations associated with outstanding loans.
Formula for the Long-Term Debt-to-Total-Assets Ratio
[ \text{LTD/TA} = \frac{\text{Long-Term Debt}}{\text{Total Assets}} ]
Significance of Long-Term Debt-to-Total-Assets Ratio
A year-over-year decrease in this ratio can indicate a reduced dependency on debt to fuel business growth. Results that are considered indicative of a ‘‘‘healthy’’’ organization vary by industry, though generally, a ratio of less than 0.5 is viewed positively.
Key Takeaways
- The long-term debt-to-total-assets ratio is important for assessing a company’s leverage and solvency.
- The ratio indicates the percentage of a company’s assets that would need to be liquidated to satisfy long-term debt.
- Analyzing trends over time can reveal changes in how a company finances its assets and its debt repayment capacity.
Example: Calculation of the Long-Term Debt-to-Total-Assets Ratio
If a company has $100,000 in total assets and $40,000 in long-term debt, the long-term debt-to-total-assets ratio is calculated as follows:
[ \frac{40{,}000}{100{,}000} = 0.4, \text{or } 40% ]
This means the company holds $0.40 of long-term debt for every dollar it owns in assets. Investors can use this ratio to compare the leverage and risk profile of this company against others in the industry.
Implications of the Ratio
High Ratio: Suggests higher risk as the company may struggle to repay its debts, potentially deterring lenders and investors.
Low Ratio: Indicates relative strength but must be assessed within the industry context for meaningful comparisons.
Differences Between Long-Term Debt-to-Total-Assets and Total Debt-to-Total-Assets Ratios
While the long-term debt-to-total-assets ratio focuses solely on long-term obligations, the total debt-to-total-assets ratio includes both:
- Long-term debts like mortgages and securities
- Short-term debts such as rent, utilities, and soon-maturing loans
Though both ratios account for all of a company’s tangible and intangible assets, the total debt-to-total-assets ratio generally shows higher liability levels due to the inclusion of short-term debts.
Related Terms: solvency ratio, total debt-to-assets ratio, financial metrics, company leverage.
