What is Debt Ratio?

For investors, a debt ratio or debt to equity ratio indicates the overall financial strategy of a business. It measures company’s total liabilities as a percentage of its total assets. It is a good indicator of financial leverage of a company.

There’s no perfect number, but your current debt ratio is an easy way to make a quick check. The higher the ratio is the more risky a company is considered to be for investors or lenders.

What is the debt ratio formula?

The formula is determined by dividing total liabilities by total total assets. Both values can be found in balance sheet. The number is usually lower than one.

Example:

Your comapny’s liabilities is 1000 GBP
Your company assets total 2000 GBP
Dividing 1000 by 2000, your total debt ratio would be 0.5.

Quick Operations Check for Potential Investors

When investors look at a company, they use the current debt ratio. Buying a business with a high ratio means you’re taking on more debt and may face challenges.

The ratio below 1 shows that company’s assets are big enough to cover all it’s liabilities. So if a company would have to sell all it assets it would earn enough to cover all the debt and there would be something left. It also means that a company may have room to expand to reach a good debt ratio by using more debt and your assets to grow your current debt ratio.

If the ratio is bigger than 1, this means that a company is more risky to invest. It has more debt than assets.

But remember — What is debt ratio success for one company may be a high for another.