Debt Ratio
Candlefocus EditorA debt ratio is calculated by dividing total debt by total assets. This ratio is typically expressed as a percentage, and tells us the degree to which a company has borrowed funds when compared to its overall asset size. Total debt includes short-term debt, long-term debt, and any other miscellaneous or unsecured debt.
For example, if a company has a total of $100 million in debt and $200 million in assets, then their debt ratio would be 50%. This means that the company has borrowed half of its total asset value. If a company has a debt ratio of over 100%, it means that it has more debt than assets. This can create a high risk situation for the company and its creditors.
It’s important to note that different industries have different debt ratios. For example, companies in the industrial sector tend to have higher debt ratios, since they require large amounts of capital to build their factories and maintain their operations. Meanwhile, technology companies generally have much lower debt ratios, as it’s more affordable for them to set up and operate in the current environment.
Along with indicating a company’s level of risk, a debt ratio can also reveal how able a company will be to access necessary capital in the future. Businesses with a high debt ratio not only may encounter difficulty securing additional funds, but they may end up paying higher interest on the money they do borrow.
As such, debt ratios can be incredibly telling figures in determining the financial health of companies. It’s important for business owners and investors to pay close attention to the debt ratios of companies they plan to enter into business with. This will help them assess how such investments may impact their business, or present risks that may harm their bottom line.