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Debt Ratio

The debt ratio is a financial metric that measures the proportion of a company’s total debt to its total assets, reflecting the level of financial leverage. It is calculated by dividing total liabilities by total assets. A higher debt ratio indicates that a company relies more on borrowed funds to finance its operations, which may increase financial risk. Conversely, a lower debt ratio suggests that the company uses less debt relative to its assets.

Example

A company with $10 million in total liabilities and $50 million in total assets has a debt ratio of 0.2 (or 20%), indicating that 20% of its assets are financed through debt.

Key points

• The debt ratio measures the proportion of a company’s debt to its total assets.

• It is a key indicator of financial leverage and risk.

• A higher debt ratio suggests greater reliance on debt, which may increase financial risk.

Quick Answers to Curious Questions

The debt ratio is calculated by dividing a company’s total liabilities by its total assets.

A high debt ratio indicates that a company relies heavily on debt to finance its assets, which may increase financial risk.

A healthy debt ratio varies by industry, but generally, a ratio below 0.5 (50%) is considered manageable, while a higher ratio may signal financial risk.