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The debt ratio or debt to assets ratio is a financial ratio which indicates the percentage of a company's assets which are funded by debt. It is measured as the ratio of total debt to total assets, which is also equal to the ratio of total liabilities and total assets:
- Debt ratio = Total Debts/Total Assets = Total Liabilities/Total Assets
Financial analysts and financial managers use the ratio in assessing the financial position of the firm. Companies with high debt to asset ratios are said to be highly leveraged, and are associated with greater risk. A high debt to asset ratio may also indicate a low borrowing capacity, which in turn will limit the firm's financial flexibility.
See also
- Equity ratio
- Debt-to-income ratio, for households
- Debt-to-GDP ratio, for governments
- Hamada's equation
References
- Drake, P. P., Financial ratio analysis, p. 9, published on 15 December 2012
- Corporate Finance: European Edition, by D. Hillier, S. Ross, R. Westerfield, J. Jaffe, and B. Jordan. McGraw-Hill, 1st Edition, 2010.
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