What are Debt Ratios?

Debt ratios give a relative picture of a company’s ability to repay debts, make interest payments, and meet other financial obligations.

They generally compare the level of debt in a company to the level of assets. Debt ratios are key for investors and particularly creditors, to determine the overall level of financial risk faced by a company.

Debt ratios that increasingly turn unattractive can serve as “canaries in a coal mine” that a company is in danger of bankruptcy or default. There are several types of debt ratios, such as debt-to-equity, debt-to-capital, cash flow to debt, and so on.