What is Debt Ratio Formula? Definition and Overview
The debt ratio is defined as the amount of debt a company has compared to its overall assets and income.
The debt ratio formula is quite straight forward.
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Simply put, the debt ratio formula is the total liabilities of a company, divided by its total assets.
Although the debt ratio formula is simplistic, it is still very important. It is a piece of information that is very useful to potential investors, for one.
If a company has a higher debt ratio, investors might perceive that as an unacceptable risk. A company with a lower debt ratio is normally a more stable investment – on average.
Debt Ration Formula – Additional Definition and Overview
The debt ratio formula should certainly not be used as the only tool for determining the stability of a given company.
There are some companies that have a very high debt ratio simply because of how they structure their operations.
Companies that are experiencing a strong growth rate also sometimes have a high debt ratio.
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In essence, the debt ratio formula is a way to get a snapshot of a company’s finances.
If their ratio is low, they are not overly leveraged or at risk.
If it is very high, they may be in an over-leveraged situation, or may have particularly high operational liabilities that simply make their debt ratio appear higher.
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