Finance Formulas / July 27, 2018 / Chanel Cleveland
The debt to total assets ratio is calculated by dividing a corporation's total liabilities by its total assets. Let's assume that a corporation has $100 million in assets, $40 million in liabilities, and $60 million in stockholders' equity. Its debt to total assets ratio will be 0.4 ($40 million of liabilities divided by $100 million of assets), or 0.4 to 1. In this example, the debt to total assets ratio tells you that 40% of the corporation's assets are financed by the creditors or debt (and therefore 60% is financed by the owners). A higher percentage indicates more leverage and more risk.
In corporate finance, the Debt-Service Coverage Ratio (DSCR) is a measure of the cash flow available to pay current debt obligations. The ratio states net operating income as a multiple of debt obligations due within one year, including interest, principal, sinking-fund and lease payments.
For example, an investor starts her own business with $100,000 and earns $120,000 in profits during the first year. Her accounting profit is $20,000. But that same year, she could have earned an income of $45,000 working as an employee for ABC Corporation. The investor’s economic profit for the year is actually a loss of $25,000.
Companies fund their capital purchases with equity and borrowed capital. The equity capitalstockholders' equity can also be viewed as a company's net assets (total assets minus total liabilities). Investors contribute their share of (paid-in) capital as stockholders, which is the basic source of total stockholders' equity. The amount of paid-in capital from an investor is a factor in determining hisher ownership percentage.
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