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How the debt-to-assets ratio works

Debt-to-assets is debt divided by total assets. On $800,000 of assets and $500,000 of debt it is 62.50 percent. Equity is the other 37.5 percent, which is also the asset fall that takes book equity to zero.

Debt-to-equity ratio

1.67

$500,000 of debt against $300,000 of equity. A 10 percent fall in asset values would leave $220,000.

Debt to assets
62.50%
Equity multiplier
2.67
Equity: assets minus debt
$300,000
Equity after a 10% fall
$220,000
Fall in equity
26.67%
$

Everything the business owns, at book value.

$

Subtracted from assets to get the equity line, so use total liabilities for book equity.

%

A stress test. Debt is a fixed claim, so equity absorbs all of it.

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In short

  • Debt-to-assets is D/AD/A. On $800,000 of assets and $500,000 of debt that is 62.50 percent, no rounding.
  • Equity's share is 100 percent minus that: 37.5 percent, which is $300,000 over $800,000.
  • A 37.5 percent fall in asset values leaves assets equal to the $500,000 of debt, so equity is zero.
  • The same assets against $200,000 of debt: debt-to-assets is 25 percent, equity's share 75 percent, multiplier 1.33.
  • How leverage ratio works is the trio. This page is the share of the sheet that was borrowed.

What share of the sheet was borrowed

Debt-to-assets asks what fraction of everything on the balance sheet was paid for with borrowed money:

D/A=DA\text{D/A} = \frac{D}{A}

On $800,000 of assets and $500,000 of debt that is 500,000/800,000=0.625500{,}000 / 800{,}000 = 0.625, 62.50 percent. It sits between 0 and 100 percent at a solvent book-value firm. Debt-to-equity on the same sheet is 1.67, which is not a share and is not capped at 1.

The leverage ratio calculator on this page prints this percent next to D/E 1.67 and the equity multiplier 2.67. How leverage ratio works is the identity that ties them. This page is the share.

The leftover is equity's share, and a distance

100 percent minus 62.50 percent is 37.5 percent. That is $300,000 over $800,000, equity's share of the assets. It is also 1/2.671 / 2.67, the reciprocal of the multiplier.

A fall in asset values equal to that share leaves assets equal to debt. On this sheet a 37.5 percent fall takes assets to $500,000. Equity is then zero. Read that as a distance on this book-value arithmetic, not as a forecast.

A 10 percent fall does not move this percent the way it moves D/E

After a 10 percent asset fall, assets are 720,000720{,}000 and debt is still $500,000. Debt-to-assets is then 500,000/720,000500{,}000 / 720{,}000, larger than 62.50 percent, because the denominator shrank. D/E moved more, because its denominator is equity, which took the whole dollar loss.

Both ratios rose with no new borrowing. Debt-to-equity against debt-to-assets is that pair on one table.

A quarter of the sheet borrowed

Keep assets at $800,000. Cut debt to $200,000. Debt-to-assets is 25 percent. Equity is $600,000, 75 percent of the sheet. D/E is 0.33. Multiplier is 1.33.

It takes a 75 percent fall in asset values to wipe that equity out. The 10 percent teaching shock takes equity to $520,000, a 13.33 percent fall, half the 26.67 percent on the first sheet.

A share is not a payment test

62.50 percent borrowed does not say whether the coupon is covered. That is interest coverage. It also does not say whether next month's bills are covered. That is the current ratio.

The household version of a borrowed share of an asset is loan-to-value, loan over a house, not total liabilities over a firm's assets.

What this page is not doing

It is not D/E, not a market-value ratio, and not a claim that 62.50 percent is high. The three sheets are 62.50 percent on $800,000 against $500,000 (equity $300,000), that sheet after a 10 percent fall (equity $220,000), and 25 percent on the same assets against $200,000 (equity $600,000, then $520,000). This is educational material, not financial advice.

Worked examples

62.50 percent of the sheet

Assets $800,000, debt $500,000. What is debt-to-assets?

  1. Equity: $300,000.
  2. Debt-to-assets: 500,000/800,000=0.625500{,}000 / 800{,}000 = 0.625, 62.50 percent.
  3. D/E 1.67, multiplier 2.67.

Debt-to-assets is 62.50 percent. Equity is $300,000. Debt-to-equity is 1.67 and the equity multiplier is 2.67.

A 10 percent fall in asset values

Same sheet. Assets fall 10 percent. What happens to equity?

  1. Assets go to 720,000720{,}000. Debt stays $500,000.
  2. Equity ends at $220,000, a 26.67 percent fall.

Equity falls from $300,000 to $220,000, 26.67 percent, on a 10 percent asset fall. The 2.67 multiplier is that amplification.

25 percent of the sheet

Assets $800,000, debt $200,000, same 10 percent fall. What is debt-to-assets?

  1. Starting equity $600,000. Debt-to-assets 25 percent. D/E 0.33. Multiplier 1.33.
  2. After the fall, equity $520,000, a 13.33 percent drop.

Debt-to-assets starts at 25 percent. Equity falls from $600,000 to $520,000, 13.33 percent.

Common questions

Can debt-to-assets exceed 100 percent?

On a book-value sheet, that would mean liabilities exceed assets, so book equity is negative. The calculator on this page needs equity to divide by for the other two ratios.

Is 62.50 percent the same as 1.67?

No. 62.50 percent is a share of assets. 1.67 is debt per dollar of equity. They are one sheet, two formulas.

Why does a 37.5 percent fall wipe equity?

Because equity was 37.5 percent of the $800,000. A fall of that size leaves assets equal to the $500,000 of debt. This is educational material, not financial advice.

Keep reading

This page is educational material, not financial advice. The figures come from the formula shown and assume the inputs you enter hold for the whole term. Your own rate, fees, taxes and timing will differ, so treat the output as arithmetic to check a decision against, not as a recommendation.