Debt Ratio

Debt ratio, communicated as a percentage, is total debt separated by total assets. As a financial term, debt ratio measures the leverage of a company or an individual. At the end of the day, the percentage of assets are funded — or borrowed (in this way making debt).

Features

• A debt ratio measures the amount of leverage involved by a company in terms of total debt to total assets.
• A company's debt ratio can be calculated by isolating total debt by total assets.
• A debt ratio of greater than 1.0 or 100% means a company has more debt than assets while a debt ratio of under 100% shows that a company has a larger number of assets than debt.
• This ratio differs widely across industries, to such an extent that capital-serious businesses will quite often have a lot higher debt ratios than others.
• A few sources believe the debt ratio to be total liabilities partitioned by total assets.

FAQ

What Does a Debt-to-Equity Ratio of 1.5 Indicate?

A debt-to-equity ratio of 1.5 would demonstrate that the company being referred to has $1.50 of debt for each $1 of equity. To delineate, assume the company had assets of $2 million and liabilities of $1.2 million. Since equity is equivalent to assets minus liabilities, the company's equity would be $800,000. Its debt-to-equity ratio would in this way be $1.2 million partitioned by $800,000, or 1.5.

What Is a Good Debt Ratio?

What considers a decent debt ratio will rely upon the idea of the business and its industry. Generally talking, a debt-to-equity or debt-to-assets ratio below 1.0 would be viewed as relatively safe, though ratios of 2.0 or higher would be viewed as risky. A few industries, like banking, are known for having a lot higher debt-to-equity ratios than others.

Could a Debt Ratio at any point Be Negative?

Assuming a company has a negative debt ratio, this would mean that the company has negative shareholder equity. All in all, the company's liabilities dwarf its assets. Much of the time, this is viewed as an exceptionally risky sign, demonstrating that the company might be at risk of bankruptcy.

What Are Some Common Debt Ratios?

All debt ratios examine a company's relative debt position. Common debt ratios incorporate debt-to-equity, debt-to-assets, long-term debt-to-assets, and leverage and gearing ratios.