Debt Ratio

Debt ratios Print Email

Definition

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. 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 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.

Debt ratio is similar to debt-to-equity ratio which shows the same proportion but in different way.

Calculation (formula)

The debt ratio is calculated by dividing total liabilities (i.e. long-term and short-term liabilities) by total assets:

Debt ratio = Liabilities / Assets

Both variables are shown on the balance sheet (statement of financial position).

Norms and Limits

The optimal debt ratio is determined by the same proportion of liabilities and equity as a debt-to-equity ratio. If the 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.

Maximum normal value is 0.6-0.7. But it is necessary to take into account industry specific, explained in the article about debt-to-equity ratio.

Exact Formula in the ReadyRatios Analytic Software

Debt ratio = F1[Liabilities] / F1[Assets]

F1 – Statement of financial position (IFRS).

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Quote Guest, 5 October, 2012
formula is wrong. it says debt-to-equity ratio; instead it should say debt ratio.
Quote Vit. A., 6 October, 2012
It was typing error. Corrected. Thanks!
Quote Guest, 31 December, 2012
I am dealing with a company that has a debt ratio of 27.99 and an acid test ratio of 0.31 should I be wary?
Quote Vit. A., 31 December, 2012
Quote
Guest wrote:
I am dealing with a company that has a debt ratio of 27.99 and an acid test ratio of 0.31 should I be wary?
Yes, ratios values are too low. It's not good. But if your company is the large public company, it may be Ok. Large public companies have nuances.
Quote Guest, 17 February, 2013
illustrations would do better for comprehension
Quote Guest, 20 February, 2013
your formula is wrong.
Quote Vit. A., 21 February, 2013
Quote
Guest wrote:
your formula is wrong.
If you think so, show your formula ;)
Quote Guest, 21 February, 2013
it says that in case of debt ratio. Higher the ratio greater the risk is. But when we talk about financial institutions then there Debt ratio is normally above 90% so in such case is it good for the organization or bad? if the trend of this ratio is on increasing side????
Quote Vit. A., 21 February, 2013
Quote
Guest wrote:
it says that in case of debt ratio. Higher the ratio greater the risk is. But when we talk about financial institutions then there Debt ratio is normally above 90% so in such case is it good for the organization or bad? if the trend of this ratio is on increasing side????


Yes, higher the ratio greater the risk is. But the exact normal value of the ratio depends on industry.
Quote Guest, 11 March, 2013
I AM DOING PROJECT IN TOWN COOPERATIVE BANK AM GETTING CASH RATIO LIKE 1.02 LIKE AND CURRENT RATIO 4.5 LIKE AM LITTLE CONFUSED CALCULATING
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