Debt Ratio

Debt Ratio is a financial metric that measures the proportion of a company’s total debt to its total Assets. It indicates the extent to which a company is financed by debt, helping to assess Financial Leverage and risk.

Formula: Debt Ratio = Total Debt / Total Assets

Examples:

• If a company has total Assets of $500,000 and total debt of $200,000, the debt ratio would be 0.4 or 40%.
• For a business with total Assets of $1,000,000 and total debt of $600,000, the debt ratio is 0.6 or 60%.

Cases:

• A debt ratio below 0.4 is often considered financially stable, indicating lower risk for Creditors.
• A debt ratio above 0.6 may signal higher financial risk, as the company relies more on borrowed funds.