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Debt ratio

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Debt ratio

Debt Ratio is a financial ratio that indicates the percentage of a company's assets that are provided via debt. It is the ratio of total debt (the sum of current liabilities and long-term liabilities) and total assets (the sum of current assets, fixed assets, and other assets such as 'goodwill').

$\mbox\left\{Debt ratio\right\} = \frac \left\{\mbox\left\{Total Debt\right\}\right\} \left\{\mbox\left\{Total Assets\right\}\right\}$

or alternatively:

$\mbox\left\{Debt ratio\right\} = \frac \left\{\mbox\left\{Total Liability\right\}\right\} \left\{\mbox\left\{Total Assets\right\}\right\}$

For example, a company with $2 million in total assets and$500,000 in total liabilities would have a debt ratio of 25%.

The higher the ratio, the greater risk will be associated with the firm's operation. In addition, high debt to assets ratio may indicate low borrowing capacity of a firm, which in turn will lower the firm's financial flexibility. Like all financial ratios, a company's debt ratio should be compared with their industry average or other competing firms.

Total liabilities divided by total assets. The debt/asset ratio shows the proportion of a company's assets which are financed through debt.

References

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