Net asset value is a company’s assets minus liabilities. Improving it involves increasing sales or reducing expenses. Accountants use the total debt to total assets ratio to determine how much debt a company uses to finance its assets. Companies can improve their net asset value ratio by reducing debt and improving net profit. Smaller companies can avoid high total debt to total assets ratios by growing through operating profit.
The net asset value in a company is the organization’s total assets minus its total liabilities. The remaining figure, either positive or negative, is the company’s net asset value. Businesses and organizations use this figure to determine the amount of wealth generated by business operations. Improving this figure comes in two ways: increasing sales or reducing expenses. Engaging in activities that meet one or both of these objectives will allow the company to reduce debt or purchase more assets that will help it increase its economic wealth.
Accountants often use the total debt to total assets ratio to determine how much debt the company uses to finance its assets. Excessive leverage of assets through increased debt not only increases the risk of the company, but also provides a negative image to outside investors and stakeholders. To calculate this ratio, accountants will divide the total debt on the balance sheet by the total assets on the same financial statement. For example, if a company has $1,500,000 United States Dollars (USD) in debt and $5,000,000 in assets, the company’s total debt to total assets ratio is .30 for the particular time period. This means that the company finances every $1 of assets with $.30 of debt. Higher ratios paint a more negative picture than a lower total debt to total assets ratio.
Companies can improve their net asset value ratio by reducing debt associated with the purchase or use of assets. To do this, the company needs to improve its net profit. Increased sales by reaching new customers or markets allows the company to experience higher profits from increased sales volume. Additional capital obtained from these sales can go toward debt reduction to improve the company’s net asset value. Cost cutting works in a similar way. Reducing expenses like labor or payroll, utilities, and maintenance costs is the other way to reduce debt. The money saved from lower costs allows more money to go against the company’s outstanding debt.
Smaller companies can avoid high total debt to total assets ratios by growing through operating profit. Using earned capital instead of foreign debt to purchase and use assets will enhance the company’s net asset value. Unfortunately, giving up debt as a growth tool usually means that the company will grow more slowly than companies that use debt. Debt allows for rapid growth, especially in industries with high profit margins. However, using operating earnings for growth will allow for a more stable and less risky approach to growing economic wealth.
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