Debt Ratio

Debt-to-assets ratio or simply debt ratio is the ratio of total liabilities of a business to its total assets. It is a solvency ratio and it measures the portion of the assets of a business which are financed through debt.

Formula

The formula to calculate the debt ratio is:

Debt Ratio = Total Liabilities
Total Assets

Total liabilities include both the current and non-current liabilities.

Analysis

Debt ratio ranges from 0.00 to 1.00. Lower value of debt ratio is favorable and a higher value indicates that higher portion of company's assets are claimed by it creditors which means higher risk in operation since the business would find it difficult to obtain loans for new projects. Debt ratio of 0.5 means that half of the company's assets are financed through debts.

Examples

In order to calculate debt ratio from the balance sheet, divide total liabilities by total assets, for example:

Example 1: Total liabilities of a company are $267,330 and total assets are $680,400. Calculate debt ratio.

Solution
Debt ratio = $267,330/$680,400 = 0.393 or 39.3%

Example 2: Current liabilities are $34,600; Non-current liabilities are $200,000; and Total assets are $504,100. Calculate debt ratio.

Solution
Since total liabilities are equal to sum of current and non-current liabilities therefore,
Debt Ratio = ($34,600 + $200,000) / $504,100 = 0.465 or 46.5%.

Written by Irfanullah Jan