debt ratio

Definition

Debt capital divided by total assets. This will tell you how much the company relies on debt to finance assets. When calculating this ratio, it is conventional to consider both current and non-current debt and assets. In general, the lower the company's reliance on debt for asset formation, the less risky the company is since excessive debt can lead to a very heavy interest and principal repayment burden. However, when a company chooses to forgo debt and rely largely on equity, they are also giving up the tax reduction effect of interest payments. Thus, a company will have to consider both risk and tax issues when deciding on an optimal debt ratio.

Also see: List of Important Financial Ratios for Stock Analysis at InvestorGuide.com.

Use debt ratio in a sentence

We had to figure out the debt ratio because it was an important factor that was essential to our company.

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The bank refused to loan ABC Company $20,000 because their high debt ratio and past credit history made them a high risk borrower.

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The debt ratio was favorable according to the financial analyst's report so we were able to approve his recommendation for investment.

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