The debt ratio is a mathematical tool used in finance and accounting to asses the amount of risk taken on by a company. The basic debt ratio compares assets to liabilities, which is said to be an indicator of the company's leverage. Leverage is how much debt the company has taken on relative to how much capital it has, including monies, investments, and property and equipment. The more capital a company has (the assets) compared to debt (the liabilities), the less leveraged or stronger equity position it is said to have. The more debt compared to assets a company has, the more highly it is leveraged. Calculating the debt ratio involves collecting the company's assets and liabilities information and performing elementary math.
- The company's balance sheet
- Calculator
- Pen and paper
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Instructions
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1
Write the total liabilities as stated on the balance sheet on a piece of paper.
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2
Write the total assets, as recorded on the balance sheet, on the same piece of paper you wrote the liabilites on.
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3
Input $2,047.87 into your calculator, hit the divide key.
Input $3,197.40 into the calculator, hit the equal sign key. This will give your answer of .640 (rounded to the nearest thousands decimal place). This number is your debt ratio. It can also be expressed as 64% by moving the decimal two places to the right and dropping the zero. Write your calculations down on your piece of paper to keep track of them.
For example: Total Liabilities = $2,047.87, Total Assets = $3,197.40.
$2,047.87/$3,197.40 = .640 or 64%.