This long term debt to total assets ratio calculator estimates at which extent a company’s assets are financed with long term debts lasting more than one year and so it helps in assessing its financial position. The formula used is explained below the form.
How does this long term debt to total assets ratio calculator work?
The algorithm behind this long term debt to total assets ratio calculator is based on the formula that divides the long term debts figure by the total assets value:
LTDTA ratio = Long Term Debt / Total Assets Value
In finance, LTDTA ratio is an indicator of the financial leverage of a corporation meaning that is indicates the percentage of total assets that were financed by external sources (exclusively long term debts which are considered to be the ones over 12 months). This ratio that demonstrates the long term solvency of a corporation should not be confused with other financial ratios that may take into account all the debts (such as current liabilities, or debts for less than a year).
Best known long term debts are mortgages, business loan over 1 year, any other loans or long term leases for different equipments or autos.
The interpretation of the long term debt to assets ratio level
Typically a high ratio is interpreted as a negative signal since it indicates a higher risk of failure or bankruptcy of the business in question due to the payments consisting of the principal and interest that should be paid in due time for outstanding loans. Thus a high ratio obliges the entity to ensure it has a sufficient total revenue generated in order to meet its financial obligations.
However, please note that the ratio level should be evaluated considering factors such as the business type and its efficiency ratios, market or economic and financial context. This is because taking long term debts in order to develop and/or improve the activity within a business may prove in certain conditions a correct approach. For instance financial experts advice to borrow money in order to develop or improve a business efficiency in case the total return generated by each dollar invested continues to be greater than the cost of the money borrowed/interest expenses.
Example of a LTDTA ratio calculation
For example, if a corporation has total assets evaluated to worth $500,000 and debts lasting more than 12 months of $100,000 then its long term debt to total assets ratio would be $100,000/$500,000 = 0.2 (or 20%), which is considered an acceptable level.03 May, 2015 | 0 comments