Loading the player...

What is a 'Debt Ratio'

The debt ratio is a financial ratio that measures the extent of a company’s leverage. The debt ratio is defined as the ratio of total debt to total assets, expressed as a decimal or percentage. It can be interpreted as the proportion of a company’s assets that are financed by debt.

debt ratio formula

The debt ratio is also referred to as the debt-to-assets ratio.


The higher the debt ratio, the more leveraged a company is, implying greater financial risk. At the same time, leverage is an important tool that companies use to grow, and many businesses find sustainable uses for debt. 

Debt ratios vary widely across industries, with capital-intensive businesses such as utilities and pipelines having much higher debt ratios than other industries such as the technology sector. For example, if a company has total assets of $100 million and total debt of $30 million, its debt ratio is 30% or 0.30. Is this company in a better financial situation than one with a debt ratio of 40%? The answer depends on the industry.

A debt ratio of 30% may be too high for an industry with volatile cash flows, in which most businesses take on little debt. A company with a high debt ratio relative to its peers would probably find it expensive to borrow and could find itself in a crunch if circumstances change. The fracking​ industry, for example, experienced tough times beginning in the summer of 2014 due to high levels of debt and plummeting energy prices.

Conversely, a debt level of 40% may be easily manageable for a company in a sector such as utilities, where cash flows are stable and higher debt ratios are the norm.

A debt ratio greater than 100% tells you that a company has more debt than assets. Meanwhile, a debt ratio less than 100% indicates that a company has more assets than debt. Used in conjunction with other measures of financial health, the debt ratio can help investors determine a company's risk level.

Some sources define the debt ratio as total liabilities divided by total assets. This reflects a certain ambiguity between the terms "debt" and "liabilities" that depends on the circumstance. The debt-to-equity ratio, for example, is closely related to and more common than the debt ratio, but uses total liabilities in the numerator. In the case of the debt ratio, financial data providers calculate it using only long-term and short-term debt (including current portions of long-term debt), excluding liabilities such as accounts payable, negative goodwill and "other."

Examples of Debt Ratio

Let's look at a few examples from different industries to contextualize the debt ratio. Starbucks Corp. (SBUX) listed $0 in short-term and current portion of long-term debt on its balance sheet for the fiscal year ended October 1, 2017, and $3,932,600,000 in long-term debt. The company's total assets were $14,365,600,000. This gives us a debt ratio of $3,932,600,000 ÷ $14,365,600,000 = 0.2738, or 27.38%.

To assess whether this is high, we should consider the capital expenditures that go into opening a Starbucks: leasing commercial space, renovating it to fit a certain layout, and purchasing expensive specialty equipment, much of which is used infrequently. The company must also hire and train employees in an industry with exceptionally high employee turnover, adhere to food safety regulations, etc. for 23,768 locations, in 74 countries. Perhaps 27% isn't so bad after all, and indeed Morningstar gives the industry average as 40%. The result is that Starbucks has an easy time borrowing money; creditors trust that it is in a solid financial position and can be expected to pay them back in full.

What about a technology company? For the fiscal year ended December 31, 2016, Facebook Inc. (FB) reported its short-term and current portion of long-term debt as $280,000,000; its long-term debt was $5,767,000,000; its total assets were $64,961,000,000. Facebook's debt ratio can be calculated as ($280,000,000 + $5,767,000,000) ÷ $64,961,000,000 = 0.0931, or 9.31%. Facebook does not borrow on the corporate bond market. It has an easy enough time raising capital through stock.

Finally, let's look at a basic materials company, the St. Louis-based miner Arch Coal Inc. (ARCH). For the fiscal year ended December 31, 2016, the company posted short-term and current portions of long-term debt of $11,038,000, long-term debt of $351,841,000 and total assets of $2,136,597,000. Coal mining is extremely capital-intensive, so the industry is forgiving of leverage: the average debt ratio is 47%. Even in this cohort, Arch Coal's debt ratio of ($11,038,000 + $351,841,000) ÷ $2,136,597,000 = 16.98% is well below average.

In the consumer lending and mortgages business, two common debt ratios that are used to assess a borrower’s ability to repay a loan or mortgage are the gross debt service ratio and the total debt service ratio. The gross debt ratio is defined as the ratio of monthly housing costs (including mortgage payments, home insurance, and property costs) to monthly income, while the total debt service ratio is the ratio of monthly housing costs plus other debt such as car payments and credit card borrowings to monthly income. Acceptable levels of the total debt service ratio, in percentage terms, range from the mid-30s to the low-40s.

  1. Capitalization Ratios

    Capitalization ratios are indicators that measure the proportion ...
  2. Long Term Debt To Total Assets ...

    A measurement representing the percentage of a corporation's ...
  3. Current Ratio

    The current ratio is a liquidity ratio that measures a company's ...
  4. Funds From Operations (FFO) To ...

    Funds from operations (FFO) to total debt ratio is a leverage ...
  5. Debt Service

    The cash that is required for a particular time period to cover ...
  6. Debt Load

    Debt load refers to the total amount of debt that a company is ...
Related Articles
  1. Investing

    Debt Ratios

    Learn about the debt ratio, debt-equity ratio, capitalization ratio, interest coverage ratio and the cash flow to debt ratio.
  2. Investing

    Debt Reckoning

    Learn about debt ratios and how to use them to assess a company's financial health. You could save a lot of money!
  3. Investing

    Will Corporate Debt Drag Your Stock Down?

    Corporate debt can mean a leg up for firms, or the boot for investors. How to tell the difference.
  4. Investing

    The Debt Report: The Industrials Sector

    Discover how industrial companies in the United States have added more debt since the Great Recession, which could spell trouble if interest rates rise.
  5. Investing

    Analyzing Wal-Mart's Debt Ratios in 2016 (WMT)

    Analyze Wal-Mart's debt-to-equity ratio, interest coverage ratio and cash flow-to-debt ratio to evaluate the company's financial health and debt management.
  6. Investing

    Ratio Analysis

    Ratio analysis is the use of quantitative analysis of financial information in a company’s financial statements. The analysis is done by comparing line items in a company’s financial ...
  7. Investing

    Key Financial Ratios to Analyze Tech Companies

    Understand the technology industry and the companies that operate in it. Learn about the key financial ratios used to analyze tech companies.
  8. Investing

    Analyzing Verizon's Debt Ratios in 2016 (VZ)

    Analyze Verizon's key debt ratios, and understand how the company has been able to expand in recent years by safely increasing its debt load.
  1. If a company has a high debt to capital ratio, what else should I look at before ...

    Learn about some of the financial leverage and profitability ratios that investors can analyze to supplement examining the ... Read Answer >>
  2. What are financial risk ratios and how are they used to measure risk?

    Explore some of the primary financial risk ratios that investors and analysts commonly use to evaluate a company's overall ... Read Answer >>
  3. What are some strategies companies commonly use to reduce their debt to capital ratio?

    Explore the different strategies that companies can employ and steps that can be taken to reduce a company's debt to capital ... Read Answer >>
  4. What is the difference between the gearing ratio and the debt-to-equity ratio?

    Dive deeper into gearing ratios: what are they, how are they used and why the debt to equity ratio is one of the most popular ... Read Answer >>
  5. Why would you look at a company's net debt rather than its gross debt?

    Learn the difference between net debt and gross debt, how to calculate debt using a company's financial statements and why ... Read Answer >>
Hot Definitions
  1. Investment Advisor

    An investment advisor is any person or group that makes investment recommendations or conducts securities analysis in return ...
  2. Gross Margin

    A company's total sales revenue minus its cost of goods sold, divided by the total sales revenue, expressed as a percentage. ...
  3. Inflation

    Inflation is the rate at which prices for goods and services is rising and the worth of currency is dropping.
  4. Discount Rate

    Discount rate is the interest rate charged to commercial banks and other depository institutions for loans received from ...
  5. Economies of Scale

    Economies of scale refer to reduced costs per unit that arise from increased total output of a product. For example, a larger ...
  6. Quick Ratio

    The quick ratio measures a company’s ability to meet its short-term obligations with its most liquid assets.
Trading Center