What it means
Where the long-term debt ratio compares borrowing with the owners' capital, this measure compares borrowing with the whole asset base. That makes it a solvency indicator, answering how much of what the company owns would be needed to clear its long-term obligations.
It matters because assets are what ultimately stand behind debt. If a business were wound down, assets would be sold to repay creditors first, so a lower percentage means a wider margin between what is owned and what is owed to long-term lenders.
Lenders often use the ratio alongside covenant testing on secured facilities. A rising percentage tells them that new borrowing is outpacing asset growth, which usually happens when debt is being used to fund losses or dividends rather than productive investment.
The measure is easy to calculate from published accounts, which makes it useful for quick comparisons, but it inherits the limitations of the balance sheet. Assets sit at book value, so a company with old property carried at historic cost can look far more indebted than it really is.
Trends and peer comparison give the number meaning. Property, energy and infrastructure businesses commonly run between 30% and 50%, service businesses often sit below 15%, and what should worry anyone is a steady climb with no matching improvement in earnings.
It is worth pairing the ratio with a look at which assets actually stand behind the debt. Freehold property and vehicles can be sold to repay lenders, whereas goodwill, bespoke fit-outs and deferred costs may realise very little, so two companies at the same percentage can offer creditors quite different protection.
In practice
Real-world examples.
Example
A self-storage operator runs at 45% because its sites are debt financed over 20 years. Investors accept the level since occupancy is stable and rental income comfortably covers the repayment schedule.
Example
A marketing consultancy shows 4%, with a single small loan against a fit-out. When it pitches for a large public sector contract, the low ratio helps it pass the financial standing test in the tender.
Example
A manufacturer's ratio drifts from 22% to 38% over three years while total assets barely move. A closer look shows the extra borrowing has funded trading losses rather than new capacity, and the bank tightens its covenants at the next review, adding quarterly management accounts and a cap on capital spending until the ratio returns below 30%.
Think of it
“Long-term debt to assets shows what portion of your assets are financed by long-term borrowings.
Formula
Calculation
Long-Term Debt to Assets Ratio = (Long-Term Debt / Total Assets) x 100
A food processing company reports total assets of $12,000,000 across property, plant, stock and receivables. Its long-term debt consists of a mortgage balance of $2,400,000 and equipment finance of $600,000, giving $3,000,000 in total.
Dividing $3,000,000 by $12,000,000 gives 0.25, which is 25% once multiplied by 100. If the company borrowed a further $1,200,000 to buy equipment of the same value, long-term debt would rise to $4,200,000 and total assets to $13,200,000, lifting the ratio to just under 32%.Case study
Seen in the real world.
Westhollow Timber is a fictional business invented to illustrate how this ratio behaves. It owned a sawmill, yard and drying kilns, with total assets of $8 million and long-term debt of $1.6 million, giving a ratio of 20% that its bank considered conservative.
A large housebuilding customer then delayed orders for nine months. In this illustrative example Westhollow kept its full workforce and covered the shortfall by drawing a further $1.4 million on a long-term facility, which raised long-term debt to $3 million while total assets stayed close to $8 million and the ratio jumped to roughly 38%.
The lender did not object at first, but at the annual review it required a plan showing how the borrowing would be repaid from trading rather than refinanced again. Westhollow sold a surplus parcel of land for $900,000, repaid part of the loan and brought the ratio back to 26%, which restored the bank's confidence.
Watch out
Common mistakes.
- Mixing up this ratio with the long-term debt ratio, which uses total capital rather than total assets as its denominator.
- Forgetting that lease liabilities now sit on the balance sheet, which raises the measured ratio for businesses that lease heavily.
- Comparing the percentage with a competitor whose property was bought decades ago and is carried far below current market value.
Questions
People also ask.
What is a safe level for this ratio?
There is no fixed threshold, though below 30% is generally comfortable for most trading businesses and above 50% invites much closer scrutiny.
Should short-term debt be included?
No, this measure deliberately excludes borrowing due within a year, which is captured by liquidity ratios such as the current ratio.
Does the ratio fall automatically as a loan is repaid?
It falls as the debt balance reduces, though depreciation shrinks total assets at the same time, so the improvement is slower than the repayments alone suggest.
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