What is the debt ratio? (2024)

FAQs

What is the debt ratio? ›

Whether or not a debt ratio is "good" depends on the context: the company's industrial sector, the prevailing interest rate, etc. In general, many investors look for a company to have a debt ratio between 0.3 and 0.6.

35% or less: Looking Good - Relative to your income, your debt is at a manageable level. You most likely have money left over for saving or spending after you've paid your bills. Lenders generally view a lower DTI as favorable.

What Is the Debt-to-Equity (D/E) Ratio? The debt-to-equity (D/E) ratio is used to evaluate a company's financial leverage and is calculated by dividing a company's total liabilities by its shareholder equity.

The debt ratio is defined as the ratio of total debt to total assets, expressed as a decimal or percentage. It can be interpreted as the proportion of a company's assets that are financed by debt.

The debt ratio indicates the percentage of the total asset amounts stated on the balance sheet that is owed to creditors. A high debt ratio indicates that a corporation has a high level of financial leverage.

Debt-to-income ratio is your monthly debt obligations compared to your gross monthly income (before taxes), expressed as a percentage. A good debt-to-income ratio is less than or equal to 36%. Any debt-to-income ratio above 43% is considered to be too much debt.

High debt ratio: If the result is a big number (like 0.7 or 70%), it means the company owes a lot compared to what it owns. This could be risky.

What is the ideal current ratio? An ideal current ratio should be between 1.2 to 2, which indicates that the business has 2 times more current assets than liabilities to covers its debts. A current ratio below 1 means that the company doesn't have enough liquid assets to cover its short-term liabilities.

The current ratio weighs a company's current assets against its current liabilities. A good current ratio is typically considered to be anywhere between 1.5 and 3.

Let's say you have 600,000$ in total assets and 150,000$ in liabilities. To calculate the debt ratio, divide the liability (150,000$ ) by the total assets (600,000$ ). This results in a debt ratio of 0.25 or 25 percent.

What is a bad debt ratio? ›

The bad debt to sales ratio represents the fraction of uncollectible accounts receivables in a year compared to total sales. For example, if a company's revenue is $100,000 and it's unable to collect $3,000, the bad debt to sales ratio is (3,000/100,000=0.03).

In an ideal world, a company would have a debt ratio of 0.5, or 50%. This would mean that the company was funded equally by debt and equity funding. If this company were to decide to seek additional funding for a project from a bank, the bank would look favorably on this debt ratio.

What is a good long-term debt ratio? A long-term debt ratio of 0.5 or less is considered a good definition to indicate the safety and security of a business.

The debt ratio of a company tells the amount of leverage it's using by comparing total debt to total assets. It is calculated by dividing total liabilities by total assets, with higher debt ratios indicating higher degrees of debt financing.

Key Takeaways

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.

Broadly speaking, ratios of 60% (0.6) or more are considered high, while ratios of 40% (0.4) or less are considered low.

A debt ratio below 0.5 is typically considered good, as it signifies that debt represents less than half of total assets. A debt ratio of 0.75 suggests a relatively high level of financial leverage, with debt constituting 75% of total assets.

Your debt-to-income (DTI) ratio is how much money you earn versus what you spend. It's calculated by dividing your monthly debts by your gross monthly income. Generally, it's a good idea to keep your DTI ratio below 43%, though 35% or less is considered “good.”