Debt ratio
Debt Ratio
A measure of a company's total debt to its total assets. A ratio less than one means that a company has more assets than debt, while a ratio of more than one means the opposite. A debt ratio is a measure of how risky it would be for a bank to extend a loan to a company, with a higher ratio indicating great risk.
| debt ratio The proportion of a firm's total assets that are being financed with borrowed funds. The debt ratio is calculated by dividing total long-term and short-term liabilities by total assets. Assets and liabilities are found on a company's balance sheet. For example, a firm with assets of $1,000,000 and $150,000 in short-term debts and $300,000 in long-term debts has a debt ratio of $450,000/$1,000,000 or 45%. A low debt ratio indicates conservative financing with an opportunity to borrow in the future at no significant risk. Compare bond ratio. |
Debt Ratio
What Does Debt Ratio Mean?
A ratio indicating the proportion of debt a company has relative to its assets; it gives a general idea of the leverage of the company along with the potential risks the company faces in terms of its debt load.
Investopedia explains Debt Ratio
A debt ratio greater than 1 indicates that a company has more debt than assets; a debt ratio less than 1 indicates that a company has more assets than debt. Used in conjunction with other measures of financial health, the debt ratio helps investors determine a company's level of risk.
Related Terms:
• Acid-Test Ratio
• Capital Structure
• Debt/Equity Ratio
• Leverage
• Leverage Ratio
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