# Debt Ratio

## **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).

## **Industry benchmark**

There is our industry benchmarking calculated using US SEC data, where you can find average values for debt ratios.

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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?

your formula is wrong.

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.