Your debt to total assets ratio indicates the amount of your company’s resources that are financed by debt. Dividends are payments that your company makes to investors. When your company’s board of directors issues a dividend, it creates an obligation to make the dividend payment to investors. The amount contained in the dividend payable account is added with your company’s other liabilities. A high debt to total assets ratio increases the likelihood that your company will not be able to pay its short-term obligations.
1. View your company’s balance sheet. Locate your company’s total assets, which should appear on the left side of the balance sheet. Assets are resources possessed by your company that hold a future economic value. Find the liabilities section, which should appear on the right side of the balance sheet. Liabilities are obligations your company has to pay.
2. Verify your company’s total liabilities. Check the current liabilities section to verify the amount in dividends payable, which indicates that a payment is owed, but has not yet been disbursed to your investors. The dividends payable account is included when calculating total liabilities. Add current liabilities with long-term liabilities to determine total liabilities. Assume your company has total liabilities equal to $300,000.
3. Confirm your company’s total assets. Add current assets, such as cash and accounts receivable, to long-term assets, such as buildings and equipment. Assume your company’s total assets equal $1,000,000.
4. Divide total liabilities by total assets. This calculation produces your company’s debt to total assets ratio. Assuming your company’s total liabilities equal $300,000 and the total assets equal $1,000,000. Divide $300,000 by $1,000,000, which equals .3, or 30 percent. In this scenario, your company’s debt to total assets ratio equals .3, or 30 percent. Understand this number means 30 percent of your company’s assets are financed by debt.
Items you will need
- Balance Sheet