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Investment Dictionary


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Total Debt Ratio

 

Total debt ratio compares total liabilities to total assets. The higher ratio represents riskier situation. And if this ratio is equal to 1.0, it would mean that liabilities are equal to assets or in other words there is no any equity which would make this a very dangerous situation in most of the cases. 

 

The lower the ratio is the higher financial safety is. However, not in all cases no debt is a best solution. Most of the times companies have to use some financial leverage to achieve target capital structure which maximize the shareholders value and return on equity.

 

Formula


Total debt ratio = Total liabilities / Total assets

 

Total liabilities = Current liabilities + Non-current liabilities = Total assets - Equity

 

* In case when this ratio is applied to the company, all data can be found in the balance sheet of the company. 

 

This ratio may have many implications in personal finance or corporate finance. For corporations ‘debt to asset’ ratio usually is used which basically is calculated in the same way only has more modifications. Yet, to measure solvency risk, more ratios can be used: ‘debt to equity’, ‘asset to equity’, ‘equity to asset’ or other financial ratios.

 






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