Debt-to-asset ratio
factor.formula
Debt-to-Market Ratio:
This formula calculates the asset-liability-to-market ratio, which is equal to 1 plus the ratio of total non-current liabilities to total market value. The formula can be broken down into two parts: the first part is 1, which represents the equity value corresponding to the market value of all stocks. The second part is the ratio of total non-current liabilities to total market value, which represents the proportion of the company's non-current liabilities in the market value and is used to measure the company's debt leverage level. This formula is used as a factor to measure company leverage in the Barra risk model.
- :
Refers to the total amount of non-current liabilities reported on a company's balance sheet, such as long-term loans, bonds payable, etc. These liabilities are usually due for more than one year and are an important part of a company's long-term capital structure. They reflect the amount of long-term debt that a company will need to repay in the future.
- :
Refers to the total value of a company's shares circulating in the stock market, usually calculated by multiplying the stock price by the number of shares outstanding. It reflects the market's assessment of the company's overall value.
factor.explanation
The debt-to-asset market value ratio reflects the ratio of a company's total assets (approximated by non-current liabilities and market value) relative to its market valuation. This ratio is often interpreted as a company's leverage level and financial risk. A higher ratio means that the company relies more on debt for operations and financing and may bear higher financial risks. However, some academic studies have shown that there may be a correlation between higher leverage levels and higher expected returns, which may reflect the market's compensation for the risk of high leverage. This factor can assist investors in analyzing a company's preferences in capital structure and help them identify potential risk premiums.