Definition: Pledged assets to secured liabilities ratio is a financial ratio that compares the book value of company assets with the book value of secured liabilities. This liquidity ratio shows creditors and investors what percentage of assets are secured by creditors. In other words, it shows how many assets the creditors have claim to in case of a default.
What Does Pledged Assets to Secured Liabilities Ratio Mean?
A pledged asset often used as collateral for a loan. It’s an asset that is owned by the company but is transferred to the lender until the loan is repaid. If the company defaults on the loan, the creditor keeps the pledged asset. This ratio compares the secured assets to the secured liabilities to measure the amount that the creditors are protected from default.
This ratio is important to both investors and creditors for different reasons. Investors need to analyze the overall liquidity and health of a company before that make an investment. A large percentage of company assets secured by creditors can indicate that company has trouble financing its operations with profits or equity. It also means that if the company declares bankruptcy, the investors will get fewer assets because the creditors have a large amount of them secured.
Creditors are concerned about this ratio because they want to make sure there are assets left to pay off their debts in case of a default. For example, if prior creditors secure 100 percent of company assets, a new creditor will be guaranteed nothing in the bankruptcy court.
Let’s take a look at an example.
Assume a company has $100,000 of total assets with a book value of $50,000 and $50,000 of debt. Only $25,000 of the total debt is owed to secured creditors and $25,000 of assets with a book value of $12,500 are pledged as collateral. This means the pledged assets to secured liabilities ratio equals 50% ($12,500 / $25,000).