What Is the Debt Ratio? How is it Calculated? | Jirav
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What is Debt Ratio?
Debt Ratio is a financial metric that compares a company's total debt to its total assets. It provides a snapshot of a company's overall financial health and is used to determine how much of a company's assets are financed by debt.
Why Debt Ratio Is Important
The Debt Ratio is an essential financial metric that helps businesses and investors understand a company's financial health. A high Debt Ratio indicates that a company is heavily reliant on debt financing, which can be a cause for concern. A high debt load can lead to a higher interest expense, which can impact a company's profitability and cash flow. On the other hand, a low Debt Ratio indicates that a company has a stronger financial position and may be less risky for investors.
How to Calculate Debt Ratio
The Debt Ratio is calculated by dividing a company's total debt by its total assets. The formula is as follows:
Debt Ratio = Total Debt / Total Assets
For example, if a company has total debt of $1,000,000 and total assets of $2,000,000, the Debt Ratio would be:
Debt Ratio = $1,000,000 / $2,000,000 = 0.5 or 50%
This means that 50% of the company's assets are financed by debt.
