It is a tool to analyze the financial condition of a company. This is a ratio of that calculates the percentage of the assets of the business that are financed directly from the loans. Sometimes a company has to finance its assets from loans and some other financial obligations that are due for that particular financial year. This ratio is calculated on yearly bases and a low long term debt to total asset ratio shows that a company is financially stable. A high ratio shows that most of the assets of the company are financed from long debt and company is financially not that stable.
Long term debt to asset ratio also indicates the long term solvency of the company. This means a company needs to generate positive revenues and a smooth cash flow within the company otherwise it will get unstable in terms of finances that may lead to liquidation. This ratio can be calculated with the help of this formula:-
Long Term Debt to Total Asset Ratio = Long term Debt/ Total Assets
This ratio helps the management of company to define its debt structure and strategy to involve percentage of debt to maintain its assets.
Suppose a company has $10,000 in the form of total assets and $5,000 in the form of long term debt. With these two figures we can calculate long term debt to total assets ratio
Long Term Debt to Total Asset Ratio = 5,000/10,000 =0.5 percent
That means each dollar or monetary unit of the assets of the company has a part of 0.5 percent of long term debt that has to be paid in that financial year.
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