Assets and Debt often appear alongside one another in the business discourse and are basic factors that demonstrate a business’s financial makeup.
The difference between assets and liabilities or a business’s debt is that assets give a business future economic benefit, helping your business grow in equity and value while liabilities are a company’s debt which it needs to repay in the future.
What is a financial asset?
Financial assets are assets that are not physical or tangible and take their value from a contractual right or ownership claim on a primary asset.
Cash, stocks, and mutual funds are examples of financial assets which, as opposed to tangible assets, do not have a physical worth or form. Their value reflects factors of supply and demand in the marketplace in which they trade, as well as the degree of risk they carry.
What is Debt?
When you owe something to someone, usually money, we call that debt. Businesses and individuals use debt to buy large items they otherwise wouldn't be able to afford in normal circumstances. A debt arrangement gives the borrowing party permission to borrow money under the condition that it is paid back at a later date, usually with interest.
Types of debt can include loans such as mortgages, auto loans, personal loans, and credit card debt. Terms of the loan usually state the amount of interest that the borrower is liable to pay each year over and above the payable amount initially borrowed.
Are Loans considered assets?
A loan may be considered both an asset and a liability (debt). When you initially take out a loan and it is received by you in cash, it becomes an asset, but it simultaneously becomes a debt on your balance sheet because you have to pay it back. Loans that are payable within one year are current assets and loans which have to be paid over a longer period are called non-current assets. Apply for an RCS personal loan.
What is a Debt-to-Asset Ratio?
A debt-to-asset ratio analyzes a company’s total debt (short and long term) against its total assets. This information is used by analysts to compare one company’s leverage over others in the same field. This ratio is also used to show how much debt is used to carry a firm’s assets and how those assets might be used to service debt - therefore measuring a company’s degree of leverage.
Why is a Debt-to-Asset Ratio Significant?
A debt-to-asset ratio is useful in that it paints a picture of how a company manages its debt over time which helps investors know whether or not it is capable of paying its return on its investment and helps creditors know how much debt the company has and whether it can pay it off. This will determine whether additional loans will be extended to the company.
How to Calculate a Debt-to-Asset Ratio
To calculate a debt-to-asset ratio you must first calculate total debts and total assets.
Total debt: This amount reflects both short and long-term debt. Corporate finance does not include liabilities which can be classified as short and long-term as well. Examples of short-term liability are employee salaries and long-term liability can be pension funds. While these are expenses a company pays they aren't seen as debt.
Total assets: These include both tangible assets such as equipment, and merchandise, and intangible assets such as copyrights, patents, and goodwill.
Input: Once these are calculated you have to input these in the formula (Debt-to-Asset Ratio = Total Debt / Total Assets).
