## Debt to Total Assets Ratio

### Learning Outcome

• Calculate the debt to assets ratio

Variations on the debt to equity ratio include:

• Debt to total assets $\left(\dfrac{\text{company’s total debt}}{\text{company’s total assets}}\right)$
• Equity to total assets $\left(\dfrac{\text{company’s equity}}{\text{company’s total assets}}\right)$

(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:

$\dfrac{1.275\text{ million}}{3.95\text{ million}}=.32278481$

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:

$\dfrac{2.675\text{ million}}{3.95\text{ million}}=.67721519\approx 67.7\%$.

Jonick Company
Comparative Balance Sheet
December 31, 2019 and 2018
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.