What is debt ratio?
Debt ratio is the percentage of a company's total debt to its total assets, indicating its financial leverage. A high debt ratio suggests greater risk, as the company may struggle to repay its debts.
How do you calculate debt ratio?
The debt ratio, a measure of financial leverage, is calculated by dividing total liabilities by total assets. It reveals the portion of assets financed by debt and is used in assessing a company's debt risk and determining the weighted average cost of capital (WACC) in financial modeling.
What does a high debt ratio mean?
A high debt ratio signals that a company relies heavily on debt to fund its operations, raising concerns about financial stability, vulnerability to economic fluctuations, and borrowing difficulties.
What does a low debt ratio mean?
A low debt ratio indicates a healthy balance sheet, with minimal debt in comparison to equity. This suggests financial stability, potential for investment, and growth opportunities, making it appealing to investors.
What is the difference between debt to equity ratio and debt to total assets ratio?
The debt to equity ratio measures a company's debt relative to shareholder equity, calculated by dividing total liabilities by total shareholders' equity. In contrast, the debt to total assets ratio assesses debt relative to total assets, determined by dividing total liabilities by total assets. The former is stricter, considering all liabilities, while the latter is more inclusive, incorporating total assets in its calculation.
What is an example of debt ratio?
Debt ratio is a metric of financial leverage, derived by dividing total debt by total assets, reflecting the share of assets financed through debt. A high debt ratio signifies elevated financial risk due to extensive debt dependence.