Debt Ratio

Debt ratios Print Email

Definition

Debt ratio is a measure of a company's debt as a percentage of its total assets. It shows how much the company relies on debt to finance its assets. The debt ratio gives users a quick measure of the amount of debt the company has on its balance sheet compared to its assets. The higher the ratio, the greater the risk associated with the company's operations. A low debt ratio indicates conservative financing with the ability to borrow in the future without significant risk.

The Debt Ratio is similar to the Debt-to-Equity Ratio, which shows the same ratio but in a 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 the numerator and denominator in this calculation are always positive numbers, so the resulting ratio cannot be negative. It's theoretically possible for a company's debt ratio to be zero, meaning that the company has no debt and only equity or assets. But in practice, it's almost impossible.

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

Benchmark

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 ReadyRatios Analysis Software

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

there 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.

The debt ratio for public companies and small companies can differ depending on various factors such as the industry they operate in, their size, and their management's financial strategy.

Large public companies, especially those that have been in operation for a long time and have a strong track record of profitability, tend to have lower debt ratios as they have access to a wide range of funding options such as equity, bonds, and bank loans. They also have more resources available to them to pay off their debt, such as cash flow from operations and the ability to raise additional capital through equity offerings.

Smaller companies, especially those that are new or are in a capital-intensive industry, may have higher debt ratios as they may not have the same level of profitability, cash flow, or access to capital as larger companies. They may have to rely more heavily on debt financing to fund their operations and growth.

You should note that there are no specific rules or regulations that dictate what a "good" or "bad" debt ratio is for public companies or small companies, as it varies based on the industry, the company's risk profile and the company's overall financial health. Some industries may have higher ratios of debt to equity than others, and some companies may have a higher tolerance for debt than others. A debt ratio does not necessarily indicate whether a company is financially healthy or not, it just one of the indicators used to assess a company's financial leverage. Other financial ratios and financial statements should be considered when evaluating a company's overall financial health and performance.

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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, 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 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.
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