Long Term Debt To Total Asset Ratio Example
Wiles is the CFO of a major corporation, Blastcorp. Blastcorp has been an extremely successful company, with expectations that it will become more successful and larger over time. In addition to the success and growth of the company, Wiles has managed his company properly up to this point, taking over and expanding operations to levels he had only hoped for. Wiles is now performing his monthly due diligence.
Wiles wants to know the ratio for Long Term Debt to Total Assets for his company. It is important to note that the long term debt to total asset ratio needs to be as low as possible. This makes sense because as the long term debt lowers or the total assets rises, the ratio goes down. Because both of those situations mean that the company is doing positive business. It seems obvious that lowering the long term debt to the total asset ratio is important for a company’s success. In order to calculate the ratio, he needs to be aware of the total long term debt that is associated with his company, as well as the figure for his total number of assets that is likewise associated with his company. This provides him information on solvency, the ability to meet financial covenants (requirements) for his loan provider, and a general measure of the performance of the corporation Wiles works for. He reviews his financial statements to find the information below. Wiles then performs a long term debt to total asset ratio calculation. The calculation is performed below:
$10,000,000 in total assets and $5,000,000 in long term debt
Long debt to total asset ratio = $5,000,000 / $10,000,000 = 0.5
This means that a company has $0.5 in long term debt for every dollar of assets.
Wiles must now review his loan agreement to assure himself that the corporation he works for will not violate covenants made for the coming months of this year. He finds that his company is safe.
Wiles would like to lower this Long Term Debt to Total Asset ratio. He makes a goal of making it only .4 or 40%. Due to the fact that Wiles is keeping up-to-date with his information and goal setting he can create the path to achieving his benchmark.
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