what is the debt ratio 
the term debt ratio refers to a financial ratio that measures the extent of a company s leverage 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 a ratio greater than 1 shows that a considerable amount of a company s assets are funded by debt which means the company has more liabilities than assets a high ratio indicates that a company may be at risk of default on its loans if interest rates suddenly rise a ratio below 1 means that a greater portion of a company s assets is funded by equity 1investopedia zoe hansendebt ratio formula and calculationas noted above a company s debt ratio is a measure of the extent of its financial leverage this ratio varies widely across industries capital intensive businesses such as utilities and pipelines tend to have much higher debt ratios than others like the technology sector the formula for calculating a company s debt ratio is debt ratio total debt total assets begin aligned text debt ratio frac text total debt text total assets end aligned debt ratio total assetstotal debt so if a company has total assets of 100 million and total debt of 30 million its debt ratio is 0 3 or 30 is this company in a better financial situation than one with a debt ratio of 40 the answer depends on the industry a debt ratio of 30 may be too high for an industry with volatile cash flows in which most businesses take on little debt a company with a high debt ratio relative to its peers would probably find it expensive to borrow and could find itself in a crunch if circumstances change conversely a debt level of 40 may be easily manageable for a company in a sector such as utilities where cash flows are stable and higher debt ratios are the norm a debt ratio greater than 1 0 100 tells you that a company has more debt than assets meanwhile a debt ratio of less than 100 indicates that a company has more assets than debt used in conjunction with other measures of financial health the debt ratio can help investors determine a company s risk level 1the concept of comparing total assets to total debt also relates to entities that may not be businesses for example the united states department of agriculture keeps a close eye on how the relationship between farmland assets debt and equity change over time 2advantages and disadvantages of the debt ratiothe debt ratio is a simple ratio that is easy to compute and comprehend it gives a fast overview of how much debt a firm has in comparison to all of its assets because public companies must report these figures as part of their periodic external reporting the information is often readily available the debt ratio aids in determining a company s capacity to service its long term debt commitments as discussed earlier a lower debt ratio signifies that the business is more financially solid and lowers the chance of insolvency with this information investors can leverage historical data to make more informed investment decisions on where they think the company s financial health may go last businesses in the same industry can be contrasted using their debt ratios it offers a comparison point to determine whether a company s debt levels are higher or lower than those of its competitors as is the story with most financial ratios you can take the calculation and compare it over time against competitors or against benchmarks to truly extract the most valuable information from the ratio there are also several downsides to the debt ratio as well the debt ratio doesn t reveal the type of debt or how much it will cost the periods and interest rates of various debts may differ which can have a substantial effect on a company s financial stability in addition the debt ratio depends on accounting information which may construe or manipulate account balances as required for external reports the debt ratio does not take a company s profitability into account if its assets provide large earnings a highly leveraged corporation may have a low debt ratio making it less hazardous contrarily if the company s assets yield low returns a low debt ratio does not automatically translate into profitability it s great to compare debt ratios across companies however capital intensity and debt needs vary widely across sectors the financial health of a firm may not be accurately represented by comparing debt ratios across industries bear in mind how certain industries may necessitate higher debt ratios due to the initial investment needed last the debt ratio is a constant indicator of a company s financial standing at a certain moment in time acquisitions sales or changes in asset prices are just a few of the variables that might quickly affect the debt ratio as a result drawing conclusions purely based on historical debt ratios without taking into account future predictions may mislead analysts 