Debt Ratio
Understanding the Debt Ratio
The Debt Ratio is a financial metric that measures the proportion of a company's total liabilities to its total assets. It is an indicator of the financial leverage of a company, providing insights into its capital structure and ability to meet long-term obligations. A higher debt ratio suggests more leverage and potentially higher financial risk, while a lower ratio indicates a more conservative approach with less reliance on debt.
Debt Ratio = Total Liabilities / Total Assets
Consider Company ABC with total liabilities of $500,000 and total assets of $1,000,000. The debt ratio is calculated as follows:
Debt Ratio=500,000/1,000,000=0.5
This means that 50% of Company ABC's assets are financed through debt, indicating a moderate level of financial leverage.
Leverage Ratio