Learning Outcome
- Calculate the debt to assets ratio
Variations on the debt to equity ratio include:
- Debt to total assets [latex]\left(\dfrac{\text{company’s total debt}}{\text{company’s total assets}}\right)[/latex]
- Equity to total assets [latex]\left(\dfrac{\text{company’s equity}}{\text{company’s total assets}}\right)[/latex]
(These two as percentages should add up to 100%. If they don’t, check your data and your calculations!)
For Jonick, total debt for 2019 was $1.275 million and assets were $3.95 million, for a ratio of .32278481:
[latex]\dfrac{1.275\text{ million}}{3.95\text{ million}}=.32278481[/latex]
That would be about .323 rounded to the nearest thousandths, and converted to a percentage would be 32.3%, meaning that portion of the assets are financed (which is reflected in the debt to equity ratio of 1:2).
We would then expect equity to total assets to be 67.7%. In fact, equity of $2.675 million divided by assets of $3.95 million is .67721519:
[latex]\dfrac{2.675\text{ million}}{3.95\text{ million}}=.67721519\approx 67.7\%[/latex].
| 2019 | 2018 | |
|---|---|---|
| Assets | ||
| Subcategory, Current assets: | ||
| Cash | $373,000 | $331,000 |
| Marketable securities | 248,000 | 215,000 |
| Accounts receivable | 108,000 | 91,000 |
| Merchandise Inventory | 55,000 | 48,000 |
| Prepaid insurance | 127,000 | 115,000 |
| Total current assets | Single Line$911,000 | Single Line$800,000 |
| Subcategory, Long-term investments: | ||
| Investment in equity securities | $1,946,000 | $1,822,000 |
| Subcategory, Property, plant and equipment: | ||
| Equipment (net of accumulated depreciation) | $87,000 | $42,000 |
| Building (net of accumulated depreciation) | 645,000 | 581,000 |
| Land | 361,000 | 361,000 |
| Total property, plant and equipment | $1,093,000 | $984,000 |
| Total assets | Single Line$3,950,000Double Line | Single Line$3,606,000Double Line |
| Liabilities | ||
| Subcategory, Current liabilities: | ||
| Accounts payable | $120,000 | $109,000 |
| Salaries payable | 244,000 | 222,000 |
| Total current liabilities | Single Line$364,000 | Single Line$331,000 |
| Subcategory, Long-term liabilities | ||
| Mortgage note payable | $83,000 | $83,000 |
| Bonds payable | 828,000 | 745,000 |
| Total long-term liabilities | Single Line$911,000 | Single Line$828,000 |
| Total liabilities | $1,275,000Double Line | $1,159,000Double Line |
| Stockholders’ Equity | ||
| Preferred $1.50 stock, $20 par | $166,000 | $166,000 |
| Common stock, $10 par | 83,000 | 83,000 |
| Retained earnings | 2,426,000 | 2,198,000 |
| Total stockholders’ equity | Single Line$2,675,000 | Single Line$2,447,000 |
| Total liabilities and stockholders’ equity | $3,950,000Double Line | $3,606,000Double Line |
In addition, investors may calculate specific other leverage ratios, such as debt to fixed assets, or the inverse, which would be fixed assets to debt, or another variation such as fixed assets to long-term debt.
For Jonick, fixed assets for 2019 were $1.093 million and long term debt was $911,000, giving an approximate ratio of 1.2:1. This is often stated simply as 1.2 or 1.2 times; fixed assets are 1.2 times the amount of long-term borrowings.
Again, the numbers by themselves are not necessarily indicative of the health of a business. They must be assessed in relation to other metrics, in relation to other periods, and in relation to other businesses, industry averages, and expectations.
Now, let’s practice what you have learned.
PRACTICE QUESTION
