Debt Ratio

The debt ratio is a financial metric that measures the proportion of a company’s total debt to its total assets, reflecting the level of financial leverage. It is calculated by dividing total liabilities by total assets. A higher debt ratio indicates that a company relies more on borrowed funds to finance its operations, which may increase financial risk. Conversely, a lower debt ratio suggests that the company uses less debt relative to its assets.

Example:

A company with $10 million in total liabilities and $50 million in total assets has a debt ratio of 0.2 (or 20%), indicating that 20% of its assets are financed through debt.

Key points

• The debt ratio measures the proportion of a company’s debt to its total assets.

• It is a key indicator of financial leverage and risk.

• A higher debt ratio suggests greater reliance on debt, which may increase financial risk.

Quick Answers to Curious Questions

How is the debt ratio calculated?

The debt ratio is calculated by dividing a company’s total liabilities by its total assets.

What does a high debt ratio indicate?

A high debt ratio indicates that a company relies heavily on debt to finance its assets, which may increase financial risk.

What is a healthy debt ratio?

A healthy debt ratio varies by industry, but generally, a ratio below 0.5 (50%) is considered manageable, while a higher ratio may signal financial risk.