Debt ratio

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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{Debt ratio} = \frac {\mbox{Total Debt}} {\mbox{Total Assets}}

or alternatively:

\mbox{Debt ratio} = \frac {\mbox{Total Liability}} {\mbox{Total Assets}}

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[edit]

  • Corporate Finance: European Edition, by D. Hillier, S. Ross, R. Westerfield, J. Jaffe, and B. Jordan. McGraw-Hill, 1st Edition, 2010.