Debt ratio is a financial ratio that indicates the proportion of total assets financed by debt capital. It is calculated by dividing the total liabilities (current and long-term liabilities) by total assets.
$$\text{Debt ratio} \mmlToken{mo}[linebreak="auto"]{=} \frac{\text{Total Liabilities}}{\text{Total Assets}}$$
The optimal debt ratio largely depends on the company's industry and is a fundamental consideration in corporate financial management. A ratio below 0.5 suggests that most of the company's assets are financed by equity rather than debt. Conversely, a ratio above 0.5 indicates higher reliance on debt financing. A high debt ratio may limit the company's ability to secure additional debt capital.
Debt Ratio FAQ
What is the debt ratio?
It shows what share of assets is financed by debt.
How do you calculate it?
Divide total liabilities by total assets.
