Key takeaways

The proportion of a company's total liabilities to its total assets is called the asset-liability ratio.

The total liabilities of a company include not only long-term liabilities, but also current liabilities.

The asset-liability ratio is an important indicator for measuring the level of debt and risk of a company.

Conceptual Understanding

The asset-liability ratio is the percentage of a company's total liabilities to its total assets.

The asset-liability ratio reflects the proportion of assets provided by creditors in all of a company's assets, reflecting the risk level of creditors providing credit funds to the company, as well as the company's ability to operate with debt.

Calculation of the asset-liability ratio

Asset-liability ratio = (total liabilities ÷ total assets) × 100%.

The total liabilities in the formula refer to all of the company's liabilities, including not only long-term liabilities, but also current liabilities.

The total assets in the formula refer to the company's total assets, including current assets (such as cash and cash equivalents, accounts receivable, inventory, etc.) and non-current assets (such as fixed assets, long-term investments, intangible assets, etc.).

How to use the asset-liability ratio

The asset-liability ratio is an important indicator for measuring the level of debt and the degree of risk in a business.

It is generally believed that the appropriate level of the asset-liability ratio is 40-60%. For businesses with higher operating risks, a lower asset-liability ratio should be chosen to control financial risk. For businesses with lower operating risks, a higher asset-liability ratio can also be chosen to increase shareholder income.