Understanding the Long-Term Debt-to-Total-Assets Ratio Formula

What Is the Long-Term Debt-to-Total-Assets Ratio?

The long-term debt-to-total-assets ratio measures a company's solvency by showing what share of its assets is financed with debt lasting more than a year. Calculated by dividing long-term debt by total assets, it helps reveal a firm's leverage and creditworthiness. Lower ratios generally signal a stronger financial position and reduced reliance on debt.

How to Calculate the Long-Term Debt-to-Total-Assets Ratio

 $LTD/TA = \dfrac{ \textit{Long-Term Debt}}{\textit{Total Assets}}$LTD/TA=Total AssetsLong-Term Debt​

Interpreting the Long-Term Debt-to-Total-Assets Ratio

A year-over-year decrease in a company's long-term debt-to-total-assets ratio may suggest that it is becoming progressively less dependent on debt to grow its business. Although a ratio result that is considered indicative of a "healthy" company varies by industry, generally speaking, a ratio result of less than 0.5 is considered good.

Real-World Example of Long-Term Debt-to-Total-Assets Ratio

If a company has $100,000 in total assets with $40,000 in long-term debt, its long-term debt-to-total-assets ratio is $40,000/$100,000 = 0.4, or 40%. This ratio indicates that the company has 40 cents of long-term debt for each dollar it has in assets. In order to compare the overall leverage position of the company, investors look at the same ratio for comparable firms, the industry as a whole, and the company's own historical changes in this ratio.

If a business has a high long-term debt-to-assets ratio, it suggests the business has a relatively high degree of risk, and eventually, it may not be able to repay its debts. This makes lenders more skeptical about loaning the business money and investors more leery about buying shares.

In contrast, if a business has a low long-term debt-to-assets ratio, it can signify the relative strength of the business. However, the assertions an analyst can make based on this ratio vary based on the company's industry as well as other factors, and for this reason, analysts tend to compare these numbers between companies from the same industry.

Comparing Long-Term Debt-to-Total-Assets Ratio With Total-Debt-to-Assets Ratio

While the long-term debt to assets ratio only takes into account long-term debts, the total-debt-to-total-assets ratio includes all debts. This measure takes into account both long-term debts, such as mortgages and securities, and current or short-term debts such as rent, utilities, and loans maturing in less than 12 months.

Both ratios, however, encompass all of a business's assets, including tangible assets such as equipment and inventory and intangible assets such as accounts receivables. Because the total debt-to-assets ratio includes more of a company's liabilities, this number is almost always higher than a company's long-term debt to assets ratio.

The Bottom Line

The long-term debt-to-total-assets ratio gauges a company's leverage by showing how much of its asset base is financed by long-term debt. Lower ratios suggest less reliance on borrowing, while the higher ratios can indicate elevated financial risk.

Because norms vary by industry, analysts compare this metric across peers to judge a firm's ability to meet long-term obligations and assess its overall financial health.