1. What is the Debt Ratio?

The Debt Ratio is a financial metric that measures the proportion of a company's assets that are financed by debt. It indicates the percentage of a company's assets that are funded by creditors rather than shareholders.

2. How Does the Calculator Work?

The calculator uses the Debt Ratio formula:

Where:

• \( \text{Total Debt} \) — All outstanding debts and liabilities of the company
• \( \text{Total Assets} \) — All assets owned by the company

Explanation: The ratio shows what percentage of the company's assets would need to be sold to pay off all outstanding debts.

3. Importance of Debt Ratio Calculation

Details: The Debt Ratio is crucial for assessing a company's financial leverage and risk. A higher ratio indicates more debt financing and higher financial risk, while a lower ratio suggests more equity financing and lower risk.

4. Using the Calculator

Tips: Enter total debt and total assets in dollars. Both values must be positive numbers, with total assets greater than zero for accurate calculation.

5. Frequently Asked Questions (FAQ)

Q1: What is a good Debt Ratio?
A: Generally, a Debt Ratio below 0.5 (50%) is considered good, indicating that less than half of the company's assets are financed by debt. However, optimal ratios vary by industry.

Q2: How does Debt Ratio differ from Debt-to-Equity Ratio?
A: Debt Ratio compares total debt to total assets, while Debt-to-Equity Ratio compares total debt to shareholders' equity. Both measure financial leverage but from different perspectives.

Q3: Can Debt Ratio be greater than 1?
A: Yes, a Debt Ratio greater than 1 indicates that a company has more debt than assets, which is a sign of financial distress and high bankruptcy risk.

Q4: How often should Debt Ratio be calculated?
A: It should be calculated regularly, typically quarterly or annually, to monitor changes in the company's financial structure and risk profile.

Q5: Does a high Debt Ratio always indicate problems?
A: Not necessarily. Some industries (like utilities or telecommunications) typically operate with higher debt ratios due to large capital investments. Context and industry norms are important.