What is debt ratio?
Debt ratio is the measure of the size of a company’s assets that are accounted for by debt. It's the amount of total debt (current liabilities and long term liabilities) and total assets (current assets, fixed assets and any other sort of asset).
Where have you heard about debt ratio?
It’s useful for businesses to understand their debt ratio – after all, the greater the ratio, the higher level of debt the company has, which in turn means the company is more at risk financially. However, leverage can be a useful tool for businesses who wish to grow.
What you need to know about debt ratio.
Debt ratios differ greatly according to industry. The percentage alone is not indicative of a company’s financial stability. A ratio of 25% or more may be too high within the biotechnology industry, which is currently known for its volatility. Contrarily, in a cash flow stable industry such a land division, a ratio of 40% may not be problematic for a company to manage. The only way to determine if a company is financially stable based on its debt ratio is to take a look at which industry it resides in.
Find out more about debt ratio.
To find out more about debt ratio, look at our page on leverage.