Debt Ratio

Good Essays
ACC111- LESSON 2

There are many tools that a company can use to evaluate how well it is performing, one of those tools is the debt ratio calculation. The debt ratio shows the proportion of assets financed with debt, liabilities. It is calculated by the companies total liabilities divided by its total assets and is used as a percentage. Total assets and total debts can be found on the balance sheet. “It can be used to evaluate a business’s ability to pay its debt” (Nobles p. 89).

The debt ratio can be used to evaluate a business’s ability to pay it’s debts. An investor will want to know what percentage a business is at because it helps determine a company 's risk level. The higher the debt ratio, the higher the risk. “Companies that have a high percentage of liabilities are at greater risk of default. If they are unable to pay their creditors as the amounts become due, the creditors have the right to claim the assets” (Nobles p. 90). As the ratio number moves closer to 1, more of a company’s assets are then being financed by debt therefore more likely moving closer to bankruptcy. The debt ratio is not just a good or bad number, “high” and “low” ratios vary by industry. “Debt ratios vary widely across industries, with capital-intensive businesses such as utilities and pipelines having much higher debt ratios than other industries like technology” (“DEFINITION of 'Debt Ratio’”, 2014).

The debt ratio is a tool that is used to determine if a company is a good investment to make and how well it is performing. The debt percentage is found by taking a companys total liabilities, or debt, and dividing it by the total assets. The percentage alone, whether it being high or low, does not determine if a company is a good or bad risk. An investor must be familiar with what that industry average is to make an educated decision. Works Cited:

Nobles, Tracie, Brenda Matisn, and Ella Mae Matsumura. "Accounting and the Business



Cited: Nobles, Tracie, Brenda Matisn, and Ella Mae Matsumura. "Accounting and the Business Environment." Horngre 's Accounting. Tenth ed. Upper Saddle River: Pearson Learning Solutions, 2014. Print. na. "Debt Ratio Definition." Investopedia. Investopedia, 17 Mar. 2014. Web. 23 Oct. 2014. DESCRIBE HOW TO CALCULATE DEBT RATIO AND EXPLAIN IT’S PURPOSE AND WHAT IT EVALUATES.

You May Also Find These Documents Helpful

  • Good Essays

    Debt Ratio

    • 408 Words
    • 2 Pages

    Debt Ratio Debt Ratio • defined as the ratio of total debt to total assets, expressed in percentage, and can be interpreted as the proportion of a company’s assets that are financed by debt. • Measures the proportion of total assets financed by the firm’s creditors. The higher this ratio, the greater amount of other people’s money being used to generate profits. Formula: • The debt ratio is calculated by dividing total debt by total assets. Debt Ratio = Total Debt Total Assets Examples •…

    • 408 Words
    • 2 Pages
    Good Essays
  • Satisfactory Essays

    Debt/Equity Ratio

    • 875 Words
    • 4 Pages

    Debt/Equity Ratio What Does Debt/Equity Ratio Mean? A measure of a company's financial leverage calculated by dividing its total liabilities by its stockholders' equity; it indicates what proportion of equity and debt the company is using to finance its assets. http://financial-dictionary.thefreedictionary.com/debt%2Fequity+ratio 'Debt/Equity Ratio' A high debt/equity ratio generally means that a company has been aggressive in financing its growth with debt. This can result in volatile earnings…

    • 875 Words
    • 4 Pages
    Satisfactory Essays
  • Good Essays

    Debt Management Ratio

    • 734 Words
    • 3 Pages

    A. Debt Management Ratios (Leverage Ratios) The extent to which a firm uses debt financing, or financial leverage, has three important implications: 1. By raising funds through debt, stockholders can maintain control of a firm while limiting their investment 2. Creditors look to the equity, or owner-supplied funds, to provide a margin of safety, so the higher the proportion of the total capital that was provided by stockholders, the less the risk faced by creditors 3. If the firm earns more…

    • 734 Words
    • 3 Pages
    Good Essays
  • Satisfactory Essays

    Debt service ratio

    • 255 Words
    • 2 Pages

    INTRODUCTION Bank Negara Malaysia (BNM) reported in its Annual Report 2010 that household debt was RM581 billion. It represents 76% of Gross Domestic Product (GDP). This scenario arises because Malaysian spend on avarage almost half of their income to pay off their debts. Only a minimum amount is left to be spent on children education, food, transport, health or even emergencies. If the breadwinner lose his job or passed away, the family will find it difficult to take over the responsibility…

    • 255 Words
    • 2 Pages
    Satisfactory Essays
  • Good Essays

    The debt ratio is defined as the ratio of total long-term and short-term debt to total assets, stated as a decimal or percentage. It can be understood as the part of a company’s assets that are financed by debt. The debt ratio started out low but has since 2015 increase to 0.90. A high debt ratio implies a low proportionate equity base. Debt to Equity Ratio The debt to equity ratio is a financial, liquidity ratio that compares a company's total debt to total equity. The debt to equity ratio shows…

    • 294 Words
    • 2 Pages
    Good Essays
  • Better Essays

    selling the Machine-Tech division. This sparks up interest to the users as to find out the reason behind it. It currently has a debt-to-equity ratio of 0.66. But, the Board of Directors has decided to raise a significant amount of debt to finance the construction of a new manufacturing plant for the Solar-Electro division. This would increase the debt-to-equity ratio, which could generate concerns to investors. It is sensible to assess a low acceptable audit risk when the external users rely greatly…

    • 1251 Words
    • 5 Pages
    Better Essays
  • Good Essays

    company’s solvency is their debt- to-asset ratio. “This ratio indicates the proportion of total assets that are financed by debt.” (text) If this ratio is high it indicates a greater financing risk. In 2007 WestJet’s debt-to-asset ratio was 68.2%, it decreased in 2008 to 66.9%. This means they are financing more of the assets with equity in 2008 compared to 2007. When we compare this ratio to Air Canada we see a telling story. In 2007 Air Canada’s debt-to-asset ratio was 77.8%, but in 2008 it rose…

    • 305 Words
    • 2 Pages
    Good Essays
  • Good Essays

    company may be in they will add value. In fact the company stands to gain significant value, regardless of the economic state. 2. What is the expected value of the company’s debt in one year, with and without the expansion? .3*14=4.2 low .5*14=2.8 Normal .2*14=2.8 High (million dollars) 4.2+7+2.8= $14 million of debt 3. One year from now, how much value creation is expected from the expansion? How much value is expected for stockholders? Bondholders? Value Created from Expansion |…

    • 671 Words
    • 3 Pages
    Good Essays
  • Satisfactory Essays

    The Debt/Equity ratio is another important indicator of Dunkin Donuts’ financial standing. In equation form, the Debt/Equity = Total Liabilities/(Total Assets – Total Liabilities). Debt/equity ratio is able to indicate all of its debt obligations of the next year with its current resources. In general, a high debt-to-equity ratio indicates that a company may not be able to generate enough cash to satisfy its debt obligations. However, a low debt-to-equity ratio may also indicate that a company is…

    • 364 Words
    • 2 Pages
    Satisfactory Essays
  • Good Essays

    it is important to consider debt-to-equity ratio and return on shareholders’ equity (ROE) in order to evaluate the relationship between risk and profitability of each company. Debt to equity ratio is a debt ratio which measures a company’s leverage. It is caculated by dividing total liabilities by total shareholder equity. During the fiscal year 2016, the debt-to-equity ratio of Costco, Target, Walmart were 1.72, 2.42, and 1.52, perspectively. Target had the highest ratio 2.42. This means for every…

    • 439 Words
    • 2 Pages
    Good Essays