Some Financial Education: The debt-to-income ratio (DTI) is utilized in personal finance, while the debt to assets ratio is a leverage ratio used to evaluate companies. Debt to Income Ratio The DTI ratio is a measure that compares an individual’s total income to his or her debt payment. Lenders use this ratio to determine the individual’s capability of managing monthly payments and his or her fundamental ability to pay back debts. The DTI ratio value is conveyed as a percentage that divides total recurring monthly debts by the individual’s gross monthly income. A lower DTI ratio indicates better financial stability. A DTI ratio that results in a high percentage is a clear signal to lenders that the individual’s debt is too high for the amount of income he or she earns. The DTI ratio may be lowered in two basic ways: increase gross monthly income or reduce the amount of recurring debt accrued monthly. Debt to Assets Ratio The debt to assets ratio is commonly referred to as simply the debt ratio or sometimes as the total debt to total assets ratio. This ratio is a leverage ratio utilized by investors and analysts to evaluate companies relative to their debt/assets leverage. It allows for easy leverage comparisons between similar companies. If this ratio results in a high percentage value, the financial risk is greater; companies utilizing a high degree of leverage are more vulnerable to financial difficulties in the event of an economic downturn. The debt to assets ratio incorporates long- and short-term debt along with tangible and intangible assets. The formula for the ratio is expressed as: Debt to assets = short-term debt + long-term debt / total assets The debt to assets ratio is not considered to be a pure measurement of a companys indebtedness. The calculation includes operational liabilities, such as accounts payable and taxes, which are not generally considered to be part of a companys outstanding debt.
Posted on: Wed, 14 Jan 2015 20:02:45 +0000
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