What Is The Formula For Determining Debt Ratio Interpreting the Debt Ratio The debt ratio is a measure of financial leverage A company that has a debt ratio of more than 50 is known as a leveraged company Its debt ratio is higher than its equity ratio It means that the business uses more of debt to fuel its funding In other words it leverages on outside sources of financing
Investors generally want a company s debt ratio to be between 0 3 and 0 6 From a pure risk perspective debt ratios of 0 4 or lower are considered better while a debt ratio of 0 6 or higher makes it more difficult to borrow money Define Debt Ratio in Simple Terms The debt ratio is the ratio of a company s debts to its assets arrived at by dividing the sum of all its liabilities by the sum of all its assets The debt ratio is a measurement of how much of a company s assets are financed by debt in other words its financial leverage If the ratio is above 1 it shows that a company has more debts than assets and may
What Is The Formula For Determining Debt Ratio
What Is The Formula For Determining Debt Ratio
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The plot thickens as the story evolves The debt ratio individually shows a macro level view of a company s debt load relative to the assets of the company Example of the Debt Ratio Formula A simple example of the debt ratio formula would be a company who has total assets of 3 million and total liabilities of 2 5 million Calculate the debt ratio Now Use the debt ratio formula to divide Total debt by Total Assets Debt Ratio Calculation Example For example consider a company with a total debt of 750 000 and total assets worth 2 000 000 By using the debt ratio equation we get debt ratio equals to 0 375
How to interpret debt ratio results As it relates to risk for lenders and investors a debt ratio at or below 0 4 or 40 is low This shows minimal risk potential longevity and strong financial health for a company Conversely a debt ratio above 0 6 or 0 7 60 70 is a higher risk and may discourage investment The company also has 300 000 in total assets So total debt 100 000 and total assets 300 000 This means that XYZ Corp has a debt ratio of 0 333 100 000 300 000 When looking at this ratio it is important to keep in mind capital expenditures and cash flows Also look at industry averages in order to make a comparison
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A debt ratio is a tool that helps determine the number of assets a company bought using debt The ratio helps investors know the risk they will be taking if they invest in an entity having higher debt used for capital building The ratio also lets them assess how fruitfully a company uses its debt to build and expand its business The total debt to total assets formula is the quotient of total debt divided by total assets As shown below total debt includes both short term and long term liabilities
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