does not consider or reflect on a company s profitability
can t always be used to compare across companies in different industriesmay not appropriately consider future implications of business decisionsspecial considerationssome sources consider the debt ratio to be total liabilities divided by total assets this reflects a certain ambiguity between the terms debt and liabilities that depends on the circumstance the debt to equity ratio for example is closely related to and more common than the debt ratio instead using total liabilities as the numerator financial data providers calculate it using only long term and short term debt including current portions of long term debt excluding liabilities such as accounts payable negative goodwill and others in the consumer lending and mortgage business two common debt ratios used to assess a borrower s ability to repay a loan or mortgage are the gross debt service ratio and the total debt service ratio the gross debt ratio is defined as the ratio of monthly housing costs including mortgage payments home insurance and property costs to monthly income while the total debt service ratio is the ratio of monthly housing costs plus other debt such as car payments and credit card borrowings to monthly income acceptable levels of the total debt service ratio range from the mid 30s to the low 40s in percentage terms 3the higher the debt ratio the more leveraged a company is implying greater financial risk at the same time leverage is an important tool that companies use to grow and many businesses find sustainable uses for debt debt ratio vs long term debt to asset ratiowhile the total debt to total assets ratio includes all debts the long term debt to assets ratio only takes into account long term debts the debt ratio total debt to assets measure takes into account both long term debts such as mortgages and securities and current or short term debts such as rent utilities and loans maturing in less than 12 months 4both ratios however encompass all of a business s assets including tangible assets such as equipment and inventory and intangible assets such as copyrights and owned brands because the total debt to assets ratio includes more of a company s liabilities this number is almost always higher than a company s long term debt to assets ratio examples of the debt ratiolet s look at a few examples from different industries to contextualize the debt ratio starbucks sbux listed 1 92 million in short term and current portion of long term debt on its balance sheet for the fiscal year ended oct 2 2022 and 13 1 billion in long term debt the company s total assets were 28 billion 5 this gives us starbuck s debt ratio of 15 billion 28 billion 0 5357 or 53 6 to assess whether this is high we should consider the capital expenditures that go into opening a starbucks including leasing commercial space renovating it to fit a certain layout and purchasing expensive specialty equipment much of which is used infrequently the company must also hire and train employees in an industry with exceptionally high employee turnover adhere to food safety regulations for its more than 18 253 stores in 2022 6perhaps 53 6 isn t so bad after all when you consider that the industry average was about 75 7 the result is that starbucks has an easy time borrowing money creditors trust that it is in a solid financial position and can be expected to pay them back in full 