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What Is the Long-Term Debt-to-Total-Assets Ratio?
Let me explain the long-term debt-to-total-assets ratio directly: it's a metric that shows the percentage of a company's assets financed by long-term debt, which includes loans or obligations lasting more than a year. You can use this ratio to gauge a company's overall long-term financial health and its capacity to handle outstanding loan payments.
The Formula for the Long-Term Debt-to-Total-Assets Ratio
Here's the straightforward formula you need: LTD/TA = Long-Term Debt / Total Assets. This calculation gives you the ratio in a simple division of long-term debt by total assets. Imagine a visual here showing this formula, as it's a common way to present it in financial analyses.
What Does the Long-Term Debt-to-Total-Assets Ratio Tell You?
When you see a year-over-year drop in this ratio, it often means the company is relying less on debt to expand its operations. Generally, a ratio under 0.5 signals a solid position, but remember, what's 'good' depends on the industry you're looking at.
Key Takeaways
- The long-term debt-to-total-assets ratio serves as a solvency metric to evaluate a company's leverage.
- It reveals the percentage of assets a company must liquidate to cover its long-term debt.
- By recalculating it over multiple periods, you can spot trends in how the company finances assets with debt rather than equity and its debt repayment capability.
Example of Long-Term Debt to Assets Ratio
Take a company with $100,000 in total assets and $40,000 in long-term debt: the ratio comes out to $40,000 / $100,000 = 0.4, or 40%. This means for every dollar in assets, there's 40 cents of long-term debt. To assess the company's leverage properly, compare this to similar firms, the industry average, and the company's own historical ratios.
A high ratio like this points to increased risk, as the company might struggle to repay debts, making lenders hesitant and investors cautious. On the flip side, a low ratio suggests financial strength, but you have to consider the industry context and other factors when analyzing it— that's why comparisons within the same sector are standard practice.
The Difference Between Long-Term Debt-to-Asset and Total Debt-to-Asset Ratios
You should know that the long-term debt-to-assets ratio focuses only on debts over a year, while the total debt-to-assets ratio includes everything—long-term items like mortgages and short-term ones like utilities or loans due soon. Both ratios cover all assets, from equipment to receivables, but the total version is always higher because it accounts for more liabilities.
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