Definition of Debt Ratio
The debt ratio is also known as the debt to asset ratio or the total debt to total assets ratio. Hence, the formula for the debt ratio is: total liabilities divided by total assets.
The debt ratio indicates the percentage of the total asset amounts (as reported on the balance sheet) that is owed to creditors.
The larger the debt ratio the greater is the company’s financial leverage. The appropriate debt ratio depends on the industry and factors that are unique to the company.
Example of Debt Ratio
Assume that a corporation’s balance sheet reports total liabilities of $60,000 and total assets of $100,000. The corporation’s debt ratio is 0.60 or 60% ($60,000 divided by $100,000).
