## Wednesday, 2 January 2019

A Debt Ratio is a ratio use to measure how big companies rely on debt to finance its assets. This Debt ratio can indicate the proportion of the company's debt to the total assets. Investors can use the ratio of debt or Debt Ratio is to know how much debt own by the company compare with its assets. Creditors can also measure how high the risk is given to a company.

The higher the ratio, the greater the risks associate with the company's operations. While the debt ratio is low indicating a conservative financing with the opportunity to borrow in the future without significant risk. Low Debt Ratio also has meaning only a small part of the company's assets are finance from debt.

Debt ratio (Debt Ratio) is almost equal to the ratio of the debt against equity, it's just calculate in different ways.

## The Formula of the Ratio of Debt (Debt Ratio)

Debt ratio (Debt Ratio) is calculate by distributing total debt (total liabilities) to total assets. The ratio of debt or Debt Ratio is often also refer to as Debt Ratio Against Total assets (Total Debt to Total Assets Ratio). The following is the formula of the ratio of debt (debt ratio):

Debt Ratio = Total Debt/Total Assets

Note:

• A debt or obligation is an obligation that must be paid in cash to the other party within a certain period. Base on a period of repayment, the obligation or debt are usually classify into current liabilities, long-term liabilities and other obligations.

• Asset or assets are all rights that can be use for the company's operations.

### Debt Ratio Calculation Example Case (Debt Ratio)

One organization have total assets of \$ 100 million and total debt of as much as us \$70 million. What is the ratio of the Debt of the organization?

Note:

(1) Total assets = \$ 100 million.
(2) Total Debt = \$ 70 million.
(3) Debt Ratio (Debt Ratio) =?

(1) Debt ratio = Total Debts/Total Assets
(2) Debt Ratio = \$ 70 million. \$ 100 million,-
(3) Debt Ratio = 0.7 times

So the ratio of the debt or the Debt Ratio on organization is of 0.7 times.

### Assessment Ratio of Debt (Debt Ratio)

The optimal Debt ratio is the ratio of the proportion of debt (liabilities) and its Equity is the same as on the Debt to Equity Ratio (the ratio of debt to the total Equity). If a debt ratio of less than 0.5 times, means the majority of the company's assets are finance through equity.

If the ratio is greater than 0.5 times, most of the assets of the company is finance through debt. Normal values are usually the Debt ratio of 0.6 to 0.7 times. But every industry has a specific and distinct assessments between one type of industry with other industries.

As additional knowledge, the definition of equity owners over the asset or assets of the company which is the net worth (total assets less liabilities). Equity deposit can consist of company owners and the rest of the profit being detain (retain earnings).