Debt ratio

Short description: Financial ratio that indicates the percentage of a company's assets that are provided via debt

Debt Ratio is a financial ratio that indicates the percentage of a company's assets that are provided via debt. It is the ratio of total debt (short-term and long-term liabilities) and total assets (the sum of current assets, fixed assets, and other assets such as 'goodwill').

Debt ratio = Total Debts/Total Assets

or alternatively:

Debt ratio = Total Liabilities/Total Assets

For example, a company with $2 million in total assets and $500,000 in total liabilities would have a debt ratio of 25%.

Total liabilities divided by total assets or the debt/asset ratio shows the proportion of a company's assets which are financed through debt. If the ratio is less than 0.5, most of the company's assets are financed through equity. If the ratio is greater than 0.5, most of the company's assets are financed through debt. Companies with high debt/asset ratios are said to be highly leveraged. The higher the ratio, the greater risk will be associated with the firm's operation. In addition, high debt to assets ratio may indicate low borrowing capacity of a firm, which in turn will lower the firm's financial flexibility. Like all financial ratios, a company's debt ratio should be compared with their industry average or other competing firms.

## See also

* Equity ratio
* Debt-to-income ratio, for households
* Debt-to-GDP ratio, for governments

## References

* Corporate Finance: European Edition, by D. Hillier, S. Ross, R. Westerfield, J. Jaffe, and B. Jordan. McGraw-Hill, 1st Edition, 2010.

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Financial ratios

* Cyclically adjusted price-to-earnings (CAPE)
* Capitalization rate (Cap Rate)
* Cash return on cash invested (CROCI)
* Debt-to-equity (D/E)
* Dividend cover
* Dividend payout
* Enterprise value/EBITDA (EV/EBITDA)
* Enterprise value/gross cash invested (EV/GCI)
* Enterprise value/sales (EV/Sales)
* Loan-to-value (LTV)
* Omega
* Operating margin
* Price-to-book (P/B)
* Price/cash flow (P/CF)
* Price-earnings (P/E)
* Price-earnings to growth (PEG)
* Price-sales (P/S)
* Profit margin
* Return on assets (ROA)
* Return on net assets (RONA)
* Return on capital (ROC)
* Return on capital employed (ROCE)
* Return on equity (ROE)
* Return on tangible equity (ROTE)
* Risk-adjusted return on capital (RAROC)
* Risk return (RRR)
* Sharpe
* Short interest (SIR)
* Sortino
* Sustainable growth (SGR)
* Treynor

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