Let’s break down a sensible enterprise situation with particular numbers to indicate precisely how this works.
Right here’s what our instance enterprise owes (Complete Money owed):
The enterprise has a financial institution mortgage of $15,000, excellent bank card debt of $5,000, and gear financing of $5,000. After we add all these money owed collectively, the whole debt involves $25,000. This represents all the cash this enterprise has borrowed and must pay again.
Right here’s what our instance enterprise owns (Complete Property):
Money in accounts totaling $20,000, gear valued at $50,000, and stock price $30,000. After we add these collectively, the whole belongings come to $100,000. This represents all the pieces of worth the enterprise owns that might probably be bought or liquidated if wanted.
Now let’s calculate:
$25,000 (whole debt) ÷ $100,000 (whole belongings) = 0.25
Convert to share:
0.25 x 100 = 25%
This 25% debt-to-asset ratio signifies that for each greenback of belongings the enterprise owns, 25 cents was financed via debt. In different phrases, the enterprise owns 75% of its belongings free and clear, with solely 25% being financed via loans or credit score. This may be thought of wholesome for many industries, because it exhibits the enterprise isn’t overly reliant on debt to finance its operations.