FREE online courses on Financial Ratio Analysis - Leverage Ratios - Debt Ratio

 

The Debt Ratio measures the level of debt in relation to our investment in assets. The Debt Ratio tells us the percent of funds provided by creditors and to what extent our assets protect us from creditors. A low Debt Ratio would indicate that we have sufficient assets to cover our debt load. Creditors and management favor a low Debt Ratio. The Debt Ratio is calculated as follows:

 

Total Liabilities / Total Assets

EXAMPLE  - Total Liabilities are $ 75,000 and Total Assets are $ 500,000. The Debt Ratio is 15%, $ 75,000 / $ 500,000 = .15. 15% of our funds for assets comes from debt.

NOTE - We use Total Liabilities to be conservative in our assessment.