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).

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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Quote ali, 13 June, 2013
you are talking about as whole debt ratio. can u compile the formula of short term debt, long term debt and total debt in percentage? am waiting for ur mail at advrsl_bba@hotmail.com
Quote Guest, 9 August, 2013
in 2011, current ratio was 1.98, debt ratio was 0.51
in 2010, current ratio was 1.65, debt ratio was 0.43
did its ability to pay debts improve or deteriorate, or did it remain the same during 2011?
Quote Guest, 1 December, 2013
Thank you for your work with all the ratios and your explanations! Normally I would never comment, but I just wanted to let you know your work is appreciated and you helped many people with this (even if they are grateful or not haha)
Once again, thank you :)
Kind regards,
Guest
Quote Guest, 30 April, 2014
Is the maximum accepted debt ratio (mentioned here) the same for the non profits?
Quote Guest, 6 May, 2014
All ratio's should be always condiered against the specific industry, find the nrom of the specific industry then your ratio will make more sense.
Quote Hassan Mbaga, 16 April, 2015
Good explanation.
Quote Guest, 23 June, 2015
Good
Quote Guest, 20 September, 2015
These information is very useful. thanks for provided such good information. appreciated.
Quote Guest, 2 January, 2018
Is it supposed to be Total Liabilities / Total assets, or liabilities/Assets?

please crosscheck.

thanks.
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