This debt ratio calculator measures the proportion of debt against the total assets of a company that indicates how much the entity relies on debt to finance assets. The debt ratio formula together with some more information on this topic can be found below the tool.
How does this debt ratio calculator work?
The algorithm behind this debt ratio calculator applies the formula explained here that considers these two variables:
Total liabilities (TL) – all the debt the company has.
Assets value (AV) according to its balance sheet.
Debt ratio formula (DR) = TL / AV
Debt ratio definition
In finance theory, the debt ratiomeasures the proportion of a business' debt to the assets it owns. It is very often used indicator by financials experts or investors when auditing the financial position of a company as it is a figure that may help in interpreting the risk associated with the business.
The interpretation of the debt ratio level
Usually the higher the debt ratio is, the greater the risk associated with the business, while a low ratio is preferable as it is a less risky situation. In most cases a low debt ratio shows that the company did not make excessively use of borrowed money or debts, but in the same time demonstrates that the entity can qualify whenever needed in the future to borrow money until it reaches an alarming level of debt ratio.
The levels of the debt ratio vary from one industry to another, so there is no 100% sure rule. However, most experts advice that is allowable a maximum debt ratio between 0.60 and 0.70.
Example of a calculation
In case of a factory with this situation:
Total liabilities = $250,000
Assets value = $670,000
The debt ratio that results is equal to 0.37 (or 37.32%).01 Dec, 2014 | 0 comments