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What is the Debt Ratio?

The debt ratio measures a company’s total debt to total assets. It is the simplest calculation available for determining how indebted a company is on a relative basis.

The debt ratio is crucial for determining a company’s financial standing, and should be considered by potential investors. To calculate the debt ratio, one only needs to divide total liabilities (i.e. long-term and short-term liabilities) by total assets.

A high debt ratio (greater than .5) indicates that a company relies significantly on debt for financing, and could indicate solvency issues if there are also cash flow problems.

A company may have growth reasons for having a high debt to equity ratios, which should also be weighed, but it generally implies greater risk.

Keywords: liabilities, risk, debt, cash flow, ratios, debt ratio, insolvency, debt financing, total debt, total assets, solvency issues,