Debt ratio is a ratio that indicates the percentage of assets that are being financed with debt. They are also used to describe the financial health of individuals or businesses.
The debt ratio is shown as a percentage as it calculates total liabilities as a percentage of total assets.
Normally, a lower debt ratio is more suitable for the business that a higher ratio. A 0.5 debt ratio is considered reasonable and less risky as it means that the liabilities are half the value of the total assets.
If the debt ratio is 1, it means that the value of the total liabilities is equal to the value of total assets.
Formula to calculate debt ratio.
Total liabilities are simply what an individual or a company owes another entity.
Total assets are resources with an economic value that are owned by an individual or a company.
You can give your debt ratio in decimal or percentage form.
Example:
An investor wanted to know the debt ratio of a certain company before he invested in it. From the financial report as of that year, the stated value of the current and non current assets was $ 50, 500,000 while the stated value of the the liabilities was $ 20, 000, 000. Calculate the debt ratio of the company.
Therefore, the debt ratio of the company is 0.4 or 40%. This means that the value of the assets of the is 2 and almost a half times the value of the liabilities. This also means that the investor can invest without worrying about the risk of losing money.
