Debt Ratio

Debt Ratio is a ratio that indicates the proportion of a company's debt to total assets. It shows how much debt is relied on to finance assets. Debt ratio is similar to Debt/Equity Ratio which shows the same proportion but in a different way.

Debt Ratio

Debt Ratio is a ratio that indicates the proportion of a company's debt to its total assets. It shows how much the company relies on debt to finance assets. Debt ratio is similar to Debt-to-Equity Ratio which shows the same proportion but in a different way.


Debt Ratio Formula

The debt ratio is calculated by dividing total liabilities by total assets.  Both figures are provided on the company balance sheet.

 

Interpretation of Debt Ratio

The Debt Ratio gives users a quick measure of the amount of debt that the company has on its balance sheets compared to its assets.

The higher the Debt Ratio, the greater the risk associated with the firm's operation. A low Debt Ratio indicates conservative financing with an opportunity to borrow in the future at no significant risk.

If the Debt Ratio is less than 0.5, most of the company's assets are financed through equity. If the ratio is greater than 0.5, most of the company's assets are financed through debt. 

The maximum value of Debt Ratio should be less than 0.7, but this figure varies with industry.

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