What is Debt Ratio?

The debt ratio is the ratio of liabilities to assets.

How it Works

A company will have assets.

Assets include cash at the bank. 

They also include inventory, buildings, and equipment

Assets also include money owed to the business by customers. 

A company will also have liabilities. 

A liability is money the company owes to others, such as a loan or money owed to suppliers.

Management and analysts need to monitor the ratio of liabilities to assets.

If the ratio becomes too high, then the company may not be able to generate enough cash flow to service the debt. 

To calculate the debt ratio, you find the total of liabilities and assets. 

After that, you divide total liabilities by total assets.