1. Debt Ratios: Introduction
  2. Debt Ratios: Overview Of Debt
  3. Debt Ratios: The Debt Ratio
  4. Debt Ratios: Debt-Equity Ratio
  5. Debt Ratios: Capitalization Ratio
  6. Debt Ratios: Interest Coverage Ratio
  7. Debt Ratios: Cash Flow To Debt Ratio

The debt ratio compares a company's total debt to its total assets. This provides creditors and investors with a general idea as to the amount of leverage being used by a company. The lower the percentage, the less leverage a company is using and the stronger its equity position. In general, the higher the ratio, the more risk that company is considered to have taken on.

The debt ratio is calculated as follows:

Total Liabilities divided by Total Assets

If a company has $1 million in total liabilities and $3 million in total assets this means that for every dollar the company has in assets, it has 33 cents worth of liabilities.

If a company has $2 million in total liabilities compared to $3 million in total assets this means that for every dollar of assets the company has 67 cents worth of liabilities.

What does the debt ratio tell us?

The debt ratio tells us the degree of leverage used by the company.

If a company has a high debt ratio (the definition of high will vary by industry) this is an indication that the company must commit a significant portion of its ongoing cash flow to the payment of principal and interest on this debt.

On the other hand, a company that employs very little debt, especially if this is low compared to other companies in the same industry, may not be properly using leverage that might increase its level of profitability.

For example, utilities generally have a higher debt ratio than companies in many other industries due to the capital-intensive nature of the utility business.

Users of this data need to look beyond the ratio to determine what makes up the company’s liabilities. Items such as trade payables and goodwill might be excluded to provide a more accurate picture of the company’s long-term debt burden compared to their assets.


Debt Ratios: Debt-Equity Ratio
Related Articles
  1. Small Business

    Total Debt to Total Assets

    Total Debt to total assets, also called the debt ratio, is an accounting measurement that shows how much of a company’s assets are funded by borrowing. In business, borrowing is also called leverage.
  2. Investing

    Debt Ratio

    The debt ratio divides a company’s total debt by its total assets to tell us how highly leveraged a company is—in other words, how much of its assets are financed by debt. The debt component ...
  3. Investing

    Calculating Long-Term Debt to Total Assets Ratio

    A company’s long-term debt to total assets ratio shows the percentage of its assets that are financed with long-term debt.
  4. Investing

    Understanding Leverage Ratios

    Large amounts of debt can cause businesses to become less competitive and, in some cases, lead to default. To lower their risk, investors use a variety of leverage ratios - including the debt, ...
  5. Investing

    Analyzing Oracle's Debt Ratios in 2016 (ORCL, SAP)

    Learn how the debt ratio, debt-to-equity ratio and debt-to-capital ratio are used to evaluate Oracle Corp.'s liabilities, equity and assets.
  6. Investing

    4 Leverage Ratios Used In Evaluating Energy Firms

    These four leverage ratios can help investors understand how oil and gas firms are managing their debt.
  7. Financial Advisor

    The Debt To Equity Ratio

    The debt to equity ratio identifies companies that are highly leveraged and therefore a higher risk for investors. Find out how this ratio is calculated and how you can use it to evaluate a stock.
Frequently Asked Questions
  1. I'm about to retire. If I pay off my mortgage with after-tax money I have saved, I can save 6.5%. Should I do this?

    Only you and your financial advisor, family, accountant, etc. can answer the "should I?" question because there are many ...
  2. My wife and I both converted our Traditional IRAs to Roth IRAs over a decade ago and have invested the maximum allowed each year since. We're buying our first home soon. Do we both qualify for one-time, tax-free, $10,000 distributions?

    You and your spouse each qualify for a penalty-free distribution of up to $10,000 for the purchase, acquisition or construction ...
  3. Is a Thrift Savings Plan (TSP) a qualified retirement plan?

    Take advantage of the government's retirement plan for employees with the Thrift Savings Plan. As with a 401(k), contributions ...
  4. Who manages the assets in a Roth 401(k) account?

    Learn how to personally manage the assets in your Roth 401(k) plan and determine the best options available to help meet ...
Trading Center