Debt Ratio is the financial ratio showing the percentage of corporate assets provided through debt. This is the ratio of total debt (long-term liabilities) and total assets (total current assets, fixed assets, and other assets such as 'goodwill').
or alternatively:
For example, a company with total assets of $ 2 million and $ 500,000 in total liabilities would have a debt ratio of 25%.
Total liabilities divided by total assets or debt/asset ratios show the proportion of company assets financed through debt. If the ratio is less than 0.5, most of the company's assets are financed through equity. If the ratio is greater than 0.5, most of the company's assets are financed through debt. Companies with high debt/asset ratios are said to be highly leveraged. The higher the ratio, the greater risk will be related to the company's operations. In addition, a high debt-to-asset ratio can indicate a low lending capacity of the firm, which in turn will reduce the company's financial flexibility. Like all financial ratios, the company's debt ratio should be compared to their industry average or other competing companies.
Video Debt ratio
References
- Corporate Financing: European Edition , by D. Hillier, S. Ross, R. Westerfield, J. Jaffe, and B. Jordan. McGraw-Hill, Issue 1, 2010.
Source of the article : Wikipedia
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