ABC Ltd., a telecom company was passing through a bad phase of business cycle and banks were unwilling to lend further amount. It decided to do introspection and compiled following information for the purposes of analysis:
| PARTICULARS | AMOUNT (₹) |
| Total debts | 900000 |
| Preference share capital | 100000 |
| Shareholders funds | 200000 |
| Current liabilities | 400000 |
| Purchases | 90000 |
| Excess of opening inventory over closing inventory | 10000 |
| Aggregate of opening and closing inventory | 50000 |
What is indicated by the total assets to debt ratio?
Answer & explanation
Correct answer: option 3
Total Assets to Debt Ratio : This ratio measures the extent of the coverage of long-term debts by assets.
It is calculated as Total assets to Debt Ratio = Total assets/Long-term debts.
The higher ratio indicates that assets have been mainly financed by owners funds and the long-term loans is adequately covered by assets. It is better to take the net assets (capital employed) instead of total assets for computing this ratio also. It is observed that in that case, the ratio is the reciprocal of the debt to capital employed ratio. Significance: This ratio primarily indicates the rate of external funds in financing the assets and the extent of coverage of their debts are covered by assets.