Debt Ratio FormulaDebt Ratio =
Total Liabilities / Total Assets
**Total Liabilities and Total Assets are found on the Balance Sheet
Sample Debt Ratio ProblemShoe Burgers reported Total Liabilities of $1,328,275 and Total Assets of $3,453,599 as of month ending 8/31. Their Debt Ratio = 1,328,275/3,453,599; Debt Ratio = .3846 or 38.5%. This means 38.5% of Shoe Burgers Assets are financed with debt, the other 61.5% is financed by investors of the Shoe Burger Corporation.
It is important to note that this ratio will vary based on industry and where one industry may have a very low Debt Ratio, another could be fairly high. However, regardless of the industry, where there is a high debt ratio, there is greater risk. Liabilities need to be paid at some point in time, and this ratio is an indication of a company's ability to pay those risks.