Financial Ratios Part 4 of 21: Debt-To-Asset Ratio
How much of my business or farm does the bank own?
Financial Ratios can assist in determining the health of a business. There is a minimum of 21 different ratios that can be looked at by many financial institutions. You cannot look at a single ratio and determine the overall health of a business or farming operation. Multiple ratios must be used along with other information to determine the total and overall health of a farming operation and business. This series of articles will look at 21 commonly used ratios.
The Debt-To-Asset ratio is a measure of Solvency and is determined based on information derived from a business’ or farm operations balance sheet. The term Solvency refers to the ability of a farm or business to pay all of its debt if it were to have to immediately sell the business or farming operation. The Debt-To-Asset ratio specifically measures the amount of debt the business or farm has when compared to the total assets owned by the business or farm.
To determine the Debt-To-Asset ratio you divide the Total Liabilities by the Total Assets.
Debt-To-Asset ratio =
This ratio is measured as a percentage. The higher the percentage the more of a business or farm is owned by the bank or in short, the more debt the business or farm has. Any ratio higher than 30% puts a business or farm at risk and lowers the borrowing capacity that business or farm has. A farm or business that has a high Debt-To-Asset ratio such as a .51 (51%) has 51% of the business essentially owned by the bank and may be considered “highly leveraged”.
If you have any further question please feel free to contact your local Farm Management Educator or the author.Information for this article has been modified and gathered using material created by the University of Minnesota Center for Farm Financial Management (CFFM).
You can read the other articles in this series:
Part 1: The current ratio
Part 2: Working capital.
Part 3: Working capital to gross revenues
Part 5: Equity-to-asset ratio
Part 6: Debt-to-equity ratio
Part 7: Net farm income
Part 8: Rate of return on assets
Part 9: Rate of return
Part 10: Operating profit margin
Part 11: The EBITDA measurement of profitability
Part 12: Operating profit margin
Part 13: Capital debt repayment margin
Part 14: Replacement margin
Part 15: Term debt coverage
Part 16: Replacement margin coverage ratio
Part 17: Asset turnover rate
Part 18: Operating-expense ratio
Part 19: Depreciation-expense ratio
Part 20: Interest-expense ratio
Part 21: Net income ratio