Debt Ratio Formula
Debt Ratio =
Total Liabilities / Total Assets
**Total Liabilities and Total Assets are found on the Balance Sheet
Sample Debt Ratio Problem
Shoe 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.
Debt Ratio Calculator (back to top of page)
What is Debt Ratio?
Debt ratio is used to evaluate a company's financial position in terms of their debt, or their ability to fulfill their financial obligations. If a company has too much debt, they are considered overleveraged. If they are overleveraged they will have difficulties obtaining new loans for future capital investments, and they are at greater risk of defaulting on current debt obligations. In short, the debt ratio is a measure of a businesses total liabilities as a percent of total assets.