Measure how much of your asset base is financed by debt.
Overview
Debt ratio is a simple leverage indicator for households and businesses.
It shows dependence on debt financing relative to owned assets.
Higher ratios usually imply higher financial risk and lower flexibility.
Tracking this ratio over time improves risk management decisions.
Steps
Include short-term and long-term obligations.
Use realistic current asset values.
Divide debt by assets.
Compare current result against prior periods.
Plan debt payoff or asset growth actions.
Math
Debt Ratio = Total Debt / Total Assets
The ratio measures proportion of assets financed through debt obligations.
Worked cases
Debt ratio = 320,000 / 500,000
Debt ratio is 0.64 (64%).
Debt ratio = 280,000 / 500,000
Ratio improves to 56%.
Debt ratio = 320,000 / 450,000
Leverage risk rises when asset values fall.
Why use this
Questions