Debt ratio is a financial metric that measures the proportion of a company’s assets financed by debt.
Primary Implication
A Debt Ratio greater than 1.0 represents higher levels of liabilities compared with assets is considered highly leveraged and riskier for lenders. Less than 1.0 means that the company owns more assets outright than it owes its creditors.
Overview
The Debt Ratio is a Solvency Ratio that measures a company’s total liabilities as a percentage of total assets, showing the company’s ability to pay off its liabilities with its assets. More simply, this ratio shows how many assets the company must sell to pay off all of its liabilities. It is a measure of the financial leverage of the company.
The formula for calculating the Debt Ratio
Total Liabilities / Total Assets
A Debt Ratio of 1 means the company would have to sell off all of its assets to pay off its liabilities. A ratio of 0.5 means that the company has twice as many assets as liabilities. This means creditors own half of the company’s assets, and the shareholders own the remainder of the assets.
Lower is Better: Less than 1 means that the company owns more assets outright than it owes its creditors.
Higher is Worse: Higher liabilities than assets are considered highly leveraged and riskier for lenders.
