Debt Ratio Definition

Definition

The debt ratio can be actually a very simple index of this leverage utilized by a business. Your debt ratio increases the percentage of their overall assets which can be funded by debt, rather than maybe not by stockholders.

Calculation

Debt Ratio = Total Liabilities / Total Assets

Explanation

The debt ratio necessitates just two inputs in its own calculation, both that can be procured from a business ‘s balance sheet. By dividing obligations with resources, this ratio informs the analyst simply how much debt has been used to fund the resources of the business.

A relatively large debt ratio can create fantastic results for stockholders provided that the provider earns an interest rate of return on resources which is higher compared to the rate of interest paid for lenders. As the percentage increases, there’s a better risk that creditors can force the company into bankruptcy when it drops behind on payments.

Generallyit’s desired to have a debt ratio which will be less than 0.5. When an organizations ratio climbs above 0.5, it’s supposed to become highly leveraged. When drawing conclusions concerning the comparative efficiency of a business, grade comparisons must be made out of competitions in precisely the exact same industry.

Example

Company A’s balance sheet indicates total resources of 31,616,000 and overall obligations of 16,196,000. Together with the above formula, the debt ratio could be:

= 16,196,000 / $31,616,000, or 0.51