Debt to assets ratio is equal to which?

• A. Total Liabilities / Total Assets
• B. Total Assets / Total Liabilities
• C. Equity / Total Assets
• D. Liabilities / Total Equity

Answer: (A)

Debt to assets shows how much of a company’s assets are financed with debt. It is calculated by dividing Total Liabilities by Total Assets. This tells you the proportion of assets funded by debt, with values between 0 and 1 (or 0% to 100% when shown as a percentage). A higher ratio indicates greater leverage and potentially higher solvency risk if earnings or cash flow decline. The other common ratios serve different purposes: equity divided by assets measures the owners’ claim on assets, not how much is financed by debt; assets divided by liabilities isn’t the standard debt-to-assets measure; and liabilities divided by total equity compares debt to owners’ funds rather than to total assets.