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. 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.
  2. Investing

    Analyzing Apple's Debt Ratios in 2016 (AAPL)

    Discover detailed analyses of Apple's four debt ratios over quarterly and annual periods between 2014 and 2015, and learn why it is financially stable.
  3. 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.
  4. Investing

    Liquidity Measurement Ratios

    Learn about the current ratio, quick ratio, cash ratio and cash conversion cycle.
  5. Investing

    Analyzing Comcast's Debt Ratios in 2016 (CMCSA)

    Evaluate Comcast's most important debt ratios, and determine whether the company is using debt responsibly and capable of meeting obligations.
  6. Investing

    Key Financial Ratios to Analyze Investment Banks

    Find out which financial ratios are most useful when analyzing an investment bank, and why tracking capital efficiency is especially important.
Trading Center