The debt-to-asset ratio is also known as the debt operation ratio. It is an indicator that measures the ability of an enterprise to use creditors to provide funds for operating activities and reflects the degree of security of creditors’ loans. This article focuses on introducing what the high debt-to-asset ratio means and the reasons for the high debt-to-asset ratio.
What is the gearing ratio?
The debt-to-asset ratio is also known as the debt-to-business ratio. It is used to measure the company’s ability to use creditors to provide funds for business activities, and an indicator that reflects the degree of security of creditors’ loans. It is obtained by comparing the total amount of debt of the company with the total amount of assets. Reflected in the company’s total assets belong to the debt ratio.
It is the percentage of total liabilities divided by total assets at the end of the period, which is the proportional relationship between total liabilities and total assets. The debt-to-asset ratio reflects how much of the total assets is financed through borrowing, and it can also measure the extent to which the company protects the interests of creditors during liquidation. The debt-to-asset ratio reflects the ratio of capital provided by creditors to total capital, and is also known as the debt-to-business ratio. Asset-liability ratio = total liabilities/total assets.
Indicates how much of the company’s total assets are raised through liabilities. This indicator is a comprehensive indicator for evaluating the company’s debt level. At the same time, it is also an indicator to measure the company’s ability to use creditor funds to conduct business activities, and it also reflects the degree of security of creditors’ loans.
If the gearing ratio reaches 100% or exceeds 100%, the company has no net assets or insolvency.
What does the high debt-to-asset ratio show?
The high debt-to-asset ratio indicates that among the resource sources of the enterprise, there are more resources derived from debt and fewer resources derived from the owner.
The debt-to-asset ratio is high and the financial risk is relatively high. When cash flow is insufficient, the resource chain is broken and debts cannot be repaid in time, leading to corporate bankruptcy. The high debt-to-asset ratio will increase the cost of further cooperation. Both banks and partners have certain requirements on the asset-liability ratio.
However, a certain debt-to-asset ratio allows companies to use debt leverage when interest rates are lower than the rate of return on cooperation to increase shareholder returns. If the asset-liability ratio is high, it is mainly caused by the increase in payables, and this increase has not led to the loss of corporate reputation and market position, and can increase the effectiveness of corporate cash utilization.
What are the reasons for the high debt-to-asset ratio?
The high debt-to-asset ratio is often caused by the company’s total debt being too high or too little total assets. These two factors determine the actual interest rate of the debt-to-asset ratio. A relatively high asset-liability ratio is often driven by shareholders or operators. The company’s quality is good, and the high asset-liability ratio is the reason for expanding operations. The company’s quality is poor, then a high asset-liability ratio is a financial risk, and the company may go bankrupt.
It is generally believed that the appropriate level of asset-liability ratio is 40-60%. The asset-liability ratio of 70% is called the warning line. The asset-liability ratio of 100% or more than 100% indicates that the company has no net assets or insolvency. The debt-to-asset ratio is an important indicator to measure the level of corporate debt and the degree of risk. The debt-to-asset ratio can reveal how much of the company’s total funding sources are provided by creditors. Therefore, the development of the company can often be done without a debt repayment crisis. , To increase as much as possible, so that we can use limited funds to raise a larger business scope.
Therefore, for the reason for the high asset-liability ratio, our main analysis method is to judge whether the company is currently in the expansion stage or the shrinking stage, and then separate the largest variables from it.
Regarding the issue of the debt-to-asset ratio, this article introduces what a high debt-to-asset ratio means and the reasons for the high debt-to-asset ratio. Simply put, the high asset-liability ratio indicates that the financial risk is relatively high! As for why the asset-liability ratio is high, this needs to be analyzed for specific reasons. For investors, we should also pay more attention to the operating conditions of the target company and adjust investment strategies in a timely manner.