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

Hint:

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.

Answer 1

The Total Assets to Debt Ratio is calculated as: \[\text{Total Assets to Debt Ratio} = \frac{\text{Total Assets}}{\text{Total Debt}}\] 1. Total Assets: Total Assets encompass Current Assets and Non-current Assets. They can also be represented as Shareholders’ Funds plus Total Debt, as liabilities finance 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, specifically 10% Debentures and the 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 Calculation: Applying 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 \( 2.5 : 1 \).