Sunday, July 5

Debt Ratio – Formula | Analysis | Example | My Accounting Course

Debt ratio is a solvency ratio that steps a company’s overall obligations as a proportion of its overall shares. In a feeling, the debt ratio indicates a firm’s capability to repay its obligations with its own shares. To put it differently, this shows the amount of shares that the business must sell so as to repay all its obligations.

This ratio steps the financial leverage of an organization. Businesses with high levels of obligations in comparison with shares are also considered highly regulated and much more risky for lenders.

This assists investors and lenders analysis the general debt burden in the provider in addition to the company’s capability to pay back the debt in the future, uncertain financial times.

Formula

The debt ratio is calculated by dividing total liabilities by total shares. Both these amounts can readily be discovered in the balance sheet. Here’s the calculation:

Debt Ratio