Long term debt to total assets ratio (LTD/TA) is a metric indicating the proportion of long-term debt—obligations lasting more than a year—in a company’s total assets. This ratio emphasizes the long-term position of a company, apparent from its inclusion of only long-term debts instead of total debts.
Long term debt to total assets is one of the leverage ratios analysts use to measure a corporation’s dependency on debt. These ratios’ purpose is to represent the capability of corporations to meet their financial obligations. Long term debt to total assets is usually calculated yearly, so analysts can compare the company’s result year-to-year to find out if the company is trying to reduce its long-term debts instead of adding it.
To evaluate LTD/TA, we can express the value in either decimal or percentage. There’s no exact number to identify if a company can be considered financially safe. Not to mention that different industries are more dependent on capital than the others. So, on average, they tend to issue more debts. As a rule of thumb, a ratio of less than 0.5 or 50% is generally okay.
Long Term Debt to Total Assets Formula
The first variable we need is long-term debts. As mentioned, long-term debts are financial obligations that last over a year. These debts usually incur interests to be paid, apart from the principal or the original loan amount. A big part of long-term debts is outstanding loans, which are used by corporations to get instant capital. Both new and mature businesses use long-term debt to start or expand their operation, in other words, to grow. As a side note, debts that are due within a year are short-term debts, as part of current liabilities.
Total assets are our second variable, which is the total amount of assets owned by an entity—whether an individual or corporation. Equity and total liabilities combined equal to total assets. So if we subtract equity—the portion of assets that the company’s truly own—from total assets, the remaining amount would be the total liabilities of the company, including short-term debts, long term debts, and other kinds of obligations. This kind of calculation is what investors and creditors use to gauge the risk factor of a company, i.e. how much debts are being used to fund its assets.
Long term debt to total assets, in particular, does not take into account short-term debts as part of total debts. Some analysts tend to use this ratio since it’s arguably a more accurate way to look at how leveraged a company is.
Not all debts are equally burdening, especially non-interest-bearing current liabilities (NIBCL). Apart from maturing within a year, these current liabilities do not incur interests to companies, unlike long-term debts. Hence, companies can pay off these liabilities just before it’s due, in other words, they are not the top priority. Most short-term debts are NIBCL, while long-terms debts are usually interest-bearing. Thus, long term debt to total assets ratio is often preferred.
To get a more comprehensive view, you can look at the company’s long-term debts to assets ratio over the years. This way, you can see if the ratio is increasing or decreasing, regardless of the amount. A company may have its long-term debts raising year after year, but its long term debt to total assets ratio is stagnant or even reducing. This can happen if the amount of equity is also improving thanks to investments.
Long Term Debt to Total Assets Example
A venture capitalist wishes to invest in a startup company that they believe will have a bright future. To determine the company’s risk, they decide to use the long term debt to total assets ratio as one of the initial assessments. From the balance sheet, they can see that the amount of long-term debts the company has is $34,000. On the other hand, its total assets are summed up to be $102,000. What is the long term debt to total assets ratio?
Let’s break it down to identify the meaning and value of the different variables in this problem.
- LTD/TA = unknown
- Long-Term Debt = 34,000
- Total Assets = 102,000
Now let’s use our formula:
We can apply the values to our variables and calculate the long term debt to total assets:
In this case, the long term debt to total assets would be 0.3333 or 33.33%.
From this result, we can see that the majority of the company’s assets are funded by equity. Thus, this particular startup company is relatively safe to invest in. To have a broader outlook, the venture capitalist shall take into consideration other factors such as the industry in which the company categorized and compare the ratio with its peers within the same industry.
Long Term Debt to Total Assets Analysis
Long term debt to total assets ratio can be an important instrument to measure the leverage a corporation use. Creditors and investors alike use this ratio to determine if they should pour money into the company in the hope of generating returns.
Businesses with a high long-term debt-to-assets ratio are comparatively riskier. In the future, they may not be able to pay off their debts and enter the state of insolvency/bankruptcy. Naturally, creditors will be more sceptical to lend funds to these company and not many investors will buy their stocks. Companies that wish to attract more capital sources need to have decent risk management.
Meanwhile, businesses with low long-term debt-to-assets are way more attractive to investors and lenders. They don’t need to worry too much should a crisis approach since these companies will still have an adequate amount of non-debt assets. Keep in mind that this does not mean that these companies are the optimal choice for investment as the ratio does not take profitability into the equation. Nonetheless, relying solely on this ratio is not a wise move.
Investors and creditors shall also take into account what type of industry the company is in. For instance, utility companies often have higher long-term debts ratio since they have a more stable cash ratio, to put it simply, a relatively constant customer base. This is the case since utility companies deal with basic needs. That’s why it’s important to only compare the metrics with other businesses in the same industry.
Long Term Debt to Total Assets Conclusion
- The long term debt to total assets measures the leverage of a company by comparing its long-term debts with total assets.
- This formula requires two variables: Long-Term Debt and Total Assets.
- LTD/TA as a leverage ratio is often preferred since it puts more emphasis on debts that have more weight and long-lasting.
- To get a more comprehensive view, you can compare the company’s ratio in different years and between companies in the same industry.
Long Term Debt to Total Assets Calculator
You can use the long term debt to total assets calculator below to quickly calculate the leverage of a company by comparing its long-term debts with total assets by entering the required numbers.
FAQs
1. What is the long-term debt to total assets ratio?
The long-term debt to total assets ratio (LTD/TA) is a metric indicating the proportion of long-term debt—obligations lasting more than a year—in a company’s total assets.
2. How is long-term debt to total assets ratio calculated?
The long-term debt to total assets ratio is calculated by taking a company's long-term debt and dividing it by its total assets.
The formula is:
LTD/TA = long-term debt / total assets
3. What is an example calculation of long-term debt to total assets ratio?
An example of long-term debt to total assets ratio is a company with $10,000 in long-term debt and $50,000 in total assets that has an LTD/TA of 20%.
4. What is a good long-term debt to total asset ratio?
In general, a ratio of less than 0.5 is good, while a ratio over 1.0 is considered high.
5. What does long-term debt to total assets ratio show us?
The long-term debt to total assets ratio is a metric that shows us the level of a company's debt in comparison to its total assets. It can be used to measure a company's debt leverage and can be helpful in determining a company's risk level. The ratio should be compared with other companies in the same industry.
