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 Guest, 9 November, 2020
I don't understand debt ratio but I am investigating a company owned by someone who owes me money.  His debt ratio is 110.11%.  Can someone explain what that means please.  Thank you
Quote Vit. A., 10 November, 2020
Quote
Guest wrote:
I don't understand debt ratio but I am investigating a company owned by someone who owes me money. His debt ratio is 110.11%. Can someone explain what that means please. Thank you
It means what you'll not get your investments back if company stops its business.
Quote Guest, 24 February, 2021
Can the debt to asset ratio be more than 100%? If so how would the balance sheet look like for Assets = Liability plus Equity.
Quote Vit. A., 25 February, 2021
Quote
Guest wrote:
Can the debt to asset ratio be more than 100%? If so how would the balance sheet look like for Assets = Liability plus Equity.
Yes, it can if Equity is negative (due to losses).
Pages: Prev. 1 2 3

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