Debt ratio

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

Debt Ratio = Total Debt / Total Assets

Debt Ratio = Total Liability / Total Assets

For example, a company with $2 million in total debt and $500,000 in total assets would have a debt ratio of 4.0.

Like all financial ratios, a company's debt ratio should be compared with their industry average or other competing firms. Generally speaking, though, a higher debt ratio means a greater liquidity (i.e., ability to meet current liabilities using current assets).[1]

[edit] References

  1. ^ Professor Cram. "Ratios of Debt Management: Debt Ratio" College-Cram.com. 14 May 2008 <http://www.college-cram.com/study/finance/presentations/126>
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