The Debt Ratio is both a risk ratio in regards to solvency as well as strategy ratio as it can also be viewed as the level of assets within a business that are financed by debt.
Simply put, it measures the level of liabilities in relation to assets and is expressed as a percentage. It tells us how high the company’s debt levels are, while not in absolute terms. And since it’s not in absolute terms you can compare across different companies of different sizes and use the same measure
It can also tell us what proportion of assets could be distributed to owners of the business if we sold all the assets and paid off the debts of the company.
In regards to being a strategy measure, you can assess what proportion of assets are financed by debt. When assets are the income generating section of the business and all assets must either be financed by debt or equity, the Debt Ratio tells us what percentage of assets are financed by debt (and not equity).
If you have a result of 55%, this means 55% of your assets are financed by debt, or put another way, for every $1 of assets there are 55 cents of debt.
Perhaps in the simplest terms, a 55% Debt Ratio means the value of debt is 55% of the value of assets.
Debt Ratio Formula
Liabilities / Assets
Debt Ratio Calculator
Specifically, the calculator asks for:
Liabilities, which is found on the balance sheet.
Assets, which is also found on the balance sheet.
Want to know more about the Ratios used in the S&P500 stock calculations, including all formulas?
Check out their individual ratio pages via the main menu for Descriptions, Calculators & Formulas
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