Definition of Debt to Assets

Debt to assets is a financial leverage ratio used to assess the creditworthiness of a corporation both by rating agencies and in debt-financed takeovers. It is used to determine the way a company finances its assets and the extent to which debt is used.

The calculation for debt to assets is:

• Total Liabilities / Total Assets

The actual calculation is open to interpretation as preferred shares can count as either debt or equity, and therefore someone working on valuation can manipulate the figures to meet the appropriate multiple requirements.

Unlike some of the other leverage ratios, debt to assets does include short-term debt and therefore takes into account any assets funded in the short-term money markets or through repo agreements.

High values of debt to assets would indicate that a company is heavily reliant on the short-term debt markets in order to fund its operations and that any change in the liquidity of these markets could have serious consequences, as happened in the 2007/2008 financial crisis.