Debt Ratio

Debt ratio is a financial ratio that indicates the proportion of total assets financed by debt capital. It is calculated by dividing the total liabilities (current and long-term liabilities) by total assets.

$$\text{Debt ratio} \mmlToken{mo}[linebreak="auto"]{=} \frac{\text{Total Liabilities}}{\text{Total Assets}}$$

The optimal debt ratio largely depends on the company's industry and is a fundamental consideration in corporate financial management. A ratio below 0.5 suggests that most of the company's assets are financed by equity rather than debt. Conversely, a ratio above 0.5 indicates higher reliance on debt financing. A high debt ratio may limit the company's ability to secure additional debt capital.