debt-to-asset ratio
The proportion of a person's total assets financed by debt — a measure of financial leverage.
Example
“A debt-to-asset ratio above 50% signals that more than half of everything owned is financed by debt.”
Memory Tip
RATIO — what percentage of what you own is actually owed to someone else.
Why It Matters
The debt-to-asset ratio helps you understand how much of your wealth is actually owned versus borrowed. A lower ratio indicates you have more financial flexibility and stability, while a higher ratio means creditors have a larger claim on your assets, which can limit your ability to borrow more or weather financial emergencies.
Common Misconception
Many people think that any debt-to-asset ratio above 50 percent automatically means they are in financial trouble. However, the interpretation depends heavily on context, including the types of assets and debt, interest rates, and income levels, so a ratio of 60 percent might be reasonable for one person but problematic for another.
In Practice
Suppose Sarah has total assets worth 300,000 dollars including her home, car, and savings, and she owes 90,000 dollars in mortgage debt and credit cards. Her debt-to-asset ratio is 90,000 divided by 300,000, or 30 percent, meaning creditors have financed 30 percent of her assets while she owns 70 percent outright.
Etymology
From Latin 'debitum' meaning owed plus Latin 'assidere' meaning to sit beside — what sits against your assets.
Common Misspellings
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Related Terms
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See Also
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