What the debt-to-asset ratio reveals about financial distress

An elevated debt-to-asset ratio is a better indicator of possible financial distress than a high debt-to-income ratio, finds new research from Statistics Canada.

In a new study, based on data from the 2016 Survey of Financial Security (SFS), the national statistical agency concluded that while the debt-to-income ratio has been rising notably in Canada over the past few years, a better indicator of financial distress for Canadian households is the debt-to-asset ratio, which, “measures a family’s resilience to financial shocks.”

“Families with a higher debt-to-asset ratio are more likely to report having experienced a variety of financial problems, like skipping or delaying payments, or using payday loans,” the study found.

Specifically, StatsCan reported that, among households with a debt-to-asset ratio that exceeds 0.5 — indicating that the value of their debt represents more than more 50% of the value of their assets — 16% missed a non-mortgage payment (such as a credit card, or household bill, payment) in the previous year.

Whereas, for households with a debt-to-asset ratio of less than 0.25, only 7% missed a bill payment.

Households with higher debt-to-asset ratios were also much more likely to miss a mortgage payment, the study found.

It noted that 7% of households with a debt-to-asset ratio of more than 0.5 missed a mortgage payment, compared with just 2% of households with a ratio under 0.25.

StatsCan said the relationship between households with a higher debt-to-income ratio and financial distress is less clear.

Other factors that are correlated with financial distress, it reported, include household income level, home ownership and family composition.

For instance, StatsCan found that single-parent families are “three times more likely to use payday loans than couples with no children,” and that these households are also more likely to miss a mortgage payment.

Staff

The staff of Advisor.ca have been covering news for financial advisors since 1998.