Long Term Debt to Total Asset Ratio
Definition of Long Term Debt to Total Asset Ratio
Long Term Debt to Total Asset Ratio is the ratio that represents the financial position of the company and the company’s ability to meet all its financial requirements. It shows the percentage of a company’s assets that are financed with loans and other financial obligations that last over a year. As this ratio is calculated yearly, decrease in the ratio would denote that the company is fairing well, and is less dependant on debts for their business needs.
Formula for Long Term Debt to Total Assets Ratio
The formula to ascertain Long Term Debt to Total Assets Ratio is as follows:
Long Term debt to Total Assets Ratio = Long Term Debt / Total Assets
For Example, a company has total assets worth $15,000 and $3000 as long term debt then the long term debt to total asset ratio would be
= 3000/15,000 = 0.2
This means that the company has $0.2 as a long term debt for every dollar it has in assets.
The higher the level of long term debt, the more important it is for a company to have positive revenue and steady cash flow. It is very helpful for management to check its debt structure and determine its debt capacity. It also shows how many assets of your company are finances with the help of debts. To calculate long term debt to total assets ratio you need to add together your current liabilities and long term debts and sum up the current and fixed assets and divide both the total liabilities and the total asset to get an output in percentage form.
The output is the assets that are financed by the debt financing while the other half is financed by the investors in your firm. Having the long term debt to total asset ratio as a high percentage should be worrying factor for the firm and the company should look in to it and determine the reason of the high percentage and try to minimize it as much as possible. The high value would mean that your company needs to have a good cash inflow to meet all the expenses.
Long Term Debt to Total Asset Ratio therefore provides a measurement to the investor regarding the percentage of a company’s assets which are financed with the help of loans or debts for a period lasting over a year.
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