What is the Debt Ratio Definition?
The debt ratio or debt to asset ratio is a financial accounting ratio which shows what percentage of a businesses assets are funded by debt.
The debt ratio formula is as follows:
Both numbers are taken from the balance sheet of the business. Debt includes all short and long term liabilities, and assets is the gross value of all current and long term assets
For example, if a business has debts of 100,000 and assets of 400,000, then the debt ratio is 100,000 / 400,000 = 25%. This indicates that 25% of its assets are funded by debt and the balance 75% funded by equity.
The value of the debt ratio will vary from industry to industry. A debt ratio above 50% is considered high and the business is said to be highly leveraged. As debt has to be repaid, sometimes on demand, the higher the debt ratio the more risky the business is considered to be.
Additional information on the debt ratio can also be found at Wikipedia Debt Ratio.
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