Question:
From the following information, calculate ‘Total Assets to Debt Ratio’:
\[
\begin{array}{|l|c|}
\hline
\text{Particulars} & \text{(₹)} \\
\hline
\text{Current Assets} & 8,00,000 \\
\text{Current Liabilities} & 5,00,000 \\
\text{10\% Debentures} & 4,00,000 \\
\text{9\% Long-term Bank Loan} & 1,00,000 \\
\text{Shareholders’ Funds} & 15,00,000 \\
\hline
\end{array}
\]
Information for Total Assets to Debt Ratio Calculation
From the following information, calculate ‘Total Assets to Debt Ratio’:
\[
\begin{array}{|l|c|}
\hline
\text{Particulars} & \text{(₹)} \\
\hline
\text{Current Assets} & 8,00,000 \\
\text{Current Liabilities} & 5,00,000 \\
\text{10\% Debentures} & 4,00,000 \\
\text{9\% Long-term Bank Loan} & 1,00,000 \\
\text{Shareholders’ Funds} & 15,00,000 \\
\hline
\end{array}
\]
Information for Total Assets to Debt Ratio Calculation
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The Total Assets to Debt Ratio measures the company's ability to cover its debt obligations using its total assets. A higher ratio (above 1) indicates that the company has sufficient assets to cover its debts.
Updated On: Jan 18, 2025
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Solution and Explanation
The formula for Total Assets to Debt Ratio is:
\[
\text{Total Assets to Debt Ratio} = \frac{\text{Total Assets}}{\text{Total Debt}}
\]
1. Total Assets:
Total Assets include Current Assets and Non-current Assets. Here, Total Assets = Shareholders’ Funds + Total Debt (since liabilities fund the remaining assets).
\[
\text{Total Assets} = ₹ 15,00,000 + ₹ (5,00,000 + 4,00,000 + 1,00,000) = ₹ 15,00,000 + ₹ 10,00,000 = ₹ 25,00,000
\]
2. Total Debt:
Total Debt includes Current Liabilities and Non-current Liabilities (10\% Debentures and 9\% Long-term Bank Loan):
\[
\text{Total Debt} = ₹ 5,00,000 + ₹ 4,00,000 + ₹ 1,00,000 = ₹ 10,00,000
\]
3. Total Assets to Debt Ratio:
Using the formula:
\[
\text{Total Assets to Debt Ratio} = \frac{₹ 25,00,000}{₹ 10,00,000} = 2.5
\]
Final Answer: The Total Assets to Debt Ratio is \( 2.5 : 1 \).
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