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The debt ratio divides a company’s total debt by its total assets to show how highly-leveraged the company is—in other words, how much of its assets are financed by debt. The debt component of the ratio includes both traditional debt and operational liabilities, such as accounts payable and taxes payable. Usually, the lower the debt ratio the better, but the acceptable debt ratio varies by industry and the stage of the company's life. A high debt ratio might also be more acceptable if the company is large and well established. 

Energy or Electric companies require lots of capital to fund and develop operations, which usually translates into having have high debt ratios. They also have the regular income of their customers' monthly payments, which reduces risk otherwise associated with a high debt ratio. Most other companies require less debt to operate and expand, and will tend to have lower debt ratios. It is important for investors to compare the debt ratio between peer companies, or an industry benchmark, in order to obtain a clear picture of the companies' health. Comparing debt ratios from a tech company to a goods company might not give an accurate depiction of their respective health. 

If the industry benchmark for technology companies is a debt ratio of 20%, an investor might not want to invest in a tech company with $500 million in assets and $200 million in debt. This 40% debt ratio would mean the company has taken on too much debt, and is likely a risky investment. However, the same ratio might be acceptable for investing in an electric company, whose industry has a benchmark ratio of around 37%. 

Debt ratios can also apply to consumers. They are calculated when a consumer wants to take out a loan, such as a mortgage or car loan. Suppose Steven wants to buy a house and the monthly mortgage payment would be $2,000. His monthly income is $6,000. Steven’s other debts include $500 per month in student loans and $300 per month for his car payment. Including the proposed mortgage payment, Steven’s total debt ratio is ($2,000+$500+$300)/$6,000. This equals a debt ratio of 46.67%. With such a high debt ratio, he would probably be rejected by the bank and not be approved for a mortgage unless he bought a less expensive house.

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