Debt ratio is a key metric for long-term creditors and investors to assess a company’s financial stability. It measures the proportion of a company’s total assets financed by liabilities rather than equity.

Debt Ratio Formula:

Debt Ratio = Total Liabilities / Total Assets​

A lower debt ratio is generally favorable, indicating that shareholders contribute a higher percentage of the company’s funding, reducing financial risk for creditors. Conversely, a higher debt ratio may signal higher leverage and increased risk.

Understanding the debt ratio is crucial for:

• Evaluating creditworthiness of a business

• Making informed lending or investment decisions

• Planning sustainable growth strategies

By maintaining a healthy debt ratio, companies can improve their financial stability, enhance investor confidence, and strategically manage liabilities while pursuing growth opportunities.