Let’s dive into a real-world business example to see how these numbers play out.
First, let’s take a look at the debts our example business is juggling:
The business has a bank loan totaling $15,000, credit card debt standing at $5,000, and $5,000 in equipment financing. When you tally it all, the business owes a total of $25,000. This figure captures all the borrowed money that the business is responsible for returning.
Now, let’s switch gears and examine what the business owns in terms of assets:
The business has $20,000 stashed in cash, equipment that’s valued at $50,000, and inventory that amounts to $30,000. Combined, these assets are worth $100,000. This total reflects everything the business owns that could be sold off or converted into cash if the need arises.
Let’s crunch these numbers:
By dividing the total debt of $25,000 by the total assets of $100,000, we get 0.25.
Converted into a percentage, that’s:
0.25 multiplied by 100 equals 25%.
So, what does a 25% debt-to-asset ratio actually mean? For every dollar’s worth of assets, 25 cents is financed through loans, while the remaining 75% is owned outright by the business. This ratio suggests a sound financial position in many industry sectors, as it indicates the business isn’t leaning too heavily on borrowing to keep things running.
