DebtRatioDefinition| Investopedia

Free Newsletters

| Free Annual Reports | Register | Sign in

Search Investopedia

DICTIONARY
#

INVESTING
B

TRADING
E

PERSONAL
FINANCE

MARKETS
G

WEALTH
MANAGEMENT
L

FINANCIAL
ADVISORS
O

Symbol

EXAM PREP

TUTORIALS
T

SearchSearch

7/26/2015

STOCK
SIMULATOR

VIDEO
W

Debt Ratio

AAA

Youmayalsolike:DoesWarrenBuffettownthesamestockasyou?
Youmayalsolike:
DoesWarrenBuffettownthesamestockasyou?

DEFINITION OF 'DEBT RATIO'

A financial ratio that measures the extent of a companys or consumers
leverage. The debt ratio is defined as the ratio of total debt to total assets,
expressed in percentage, and can be interpreted as the proportion of a
companys assets that are financed by debt.

The higher this ratio, the more leveraged the company and the greater its
financial risk. 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. In the consumer lending and mortgage
businesses, debt ratio is defined as the ratio of total debt service obligations to
gross annual income.
Ads
Perdagangan Forex Online
www.ufx.com
Buka Akaun Hari & Dapatkan 400:1
leveradge. Earn Money Online!

Forex Online - Malaysia

www.plus500.com.my/Malaysia
Jual Beli Forex dengan Leveraj. CFD
service. 25 Daftar bonus

INVESTOPEDIA EXPLAINS 'DEBT RATIO'

A company with total assets of $100 million and total debt of $30 million has a
debt ratio of 30%. Is this company in a better financial situation than one with a
debt ratio of 40%? It depends on the industry in which the companies operate.
A debt ratio of 30% may be too high for a company that operates in a sector
where cash flows are volatile and its peers have little debt, since this debt level
may reduce its financial flexibility and competitive advantage. Conversely, a
debt level of 40% may be easily manageable for a company in a sector such as
utilities, where cash flows are stable and higher debt ratios are the norm.
A debt ratio of greater than 1 indicates that a company has more debt than
assets. Meanwhile, a debt ratio of less than 1 indicates that a company has more
assets than debt. Used in conjunction with other measures of financial health,
the debt ratio can help investors determine a company's risk level.
In the consumer lending and mortgages business, two common debt ratios used
to assess a borrowers ability to repay a loan or mortgage are the gross debt
service ratio and the total debt service ratio. The gross debt ratio is defined as
the ratio of monthly housing costs (including mortgage payments, home
insurance and property costs) to monthly income, while the total debt service
http://www.investopedia.com/terms/d/debtratio.asp

Subscribe to our Free Newsletters!

Enter e-mail address

Sign Up
Learn More

Marketplace

Are you interested in generating income?

Complimentary Futures Trading Kit
FREE Award-Winning Software - Ninja Trader

1/5

7/26/2015

DebtRatioDefinition| Investopedia

ratio is the ratio of monthly housing costs plus other debt such as car payments
and credit card borrowings to monthly income. Acceptable levels of the total
debt service ratio, in percentage terms, range from the mid-30s to the low-40s.

VIDEO

Easiest Way to Pull Profits from the Market...

Exclusive: Learn the "House Odds" of Investing

HOT DEFINITIONS

Sin Tax
Grandfathered Activities
Touchline
Himalayan Option
Wrongful Termination Claim
Escrow Agent

Trading Center

Refine Your Financial Vocabulary

Gain the Financial Knowledge You Need to Succeed. Investopedias FREE Term
of the Day helps you gain a better understanding of all things financial with
technical and easy-to-understand explanations. Click here to begin developing
your financial language with this daily newsletter.

TAGS:

Corporate Debt

Fundamental Analysis

Solvency Ratio

Ads
5 Stocks Set To Double
www.zacks.com
See The Stocks Experts Favor Today. Sign Up For This Free Report Now!
Options Trading Lessons
wealthdaily.com/Options_Trading
With just these 3 Free reports you could be trading by day's end.
HSBC Cash Back Loan
www.hsbcamanah.com.my
Get Up To RM1,000 Cash Back With Approval Within Same Working Day*

License Content Order Reprints

Follow Term Of The Day:

Subscribe:
Enter e-mail address

Sign Up

RELATED TERMS
http://www.investopedia.com/terms/d/debtratio.asp

2/5

7/26/2015

DebtRatioDefinition| Investopedia

Solvency Ratio

Total Debt To Total Assets

Long Term Debt To Total Assets ...

Debt Rescheduling

Debt/Equity Ratio

Acid-Test Ratio

One of many ratios used to measure a

company's ability to meet ...

A measurement representing the

percentage of a corporation's ...

A measure of a company's financial

leverage calculated by dividing ...

A measure of financial risk that determines

the proportion of ...

A practice that involves restructuring the

terms of an existing ...

A stringent indicator that determines

whether a firm has enough ...

RELATED FAQS
Q: Why do shareholders need financial statements?
A: Shareholders need financial statements to evaluate their equity investments and help
them make informed decisions as to how ... Read Full Answer >>

Q: What are key government regulations that affect investing in the banking
sector?
A: In the aftermath of the global financial crisis of 2008, the banking sector in the United
States became subject to a number ... Read Full Answer >>

Q: How do interest rates and debt ratios affect the price of a blue-chip stock?
A: Blue-chip stocks are affected by interest rates and debt ratios, but not to the extent that
stocks of less-established companies ... Read Full Answer >>

Q: After Enron, are SPVs / SPEs considered good business practice?

A: A special purpose vehicle (SPV), also known as a special purpose entity (SPE), is a
separate entity created by a company ... Read Full Answer >>

Q: What is the difference between the debt ratio of a company and the debt ratio
of ...
A: The difference between the debt ratio of a company and the debt ratio of an individual
is primarily one of scale and complexity. ... Read Full Answer >>

Q: What factors make it difficult to compare performance ratios between retail

stocks?
A: Companies that operate in the retail sector significantly differ in terms of their
profitability and efficiency, making stock ... Read Full Answer >>

RELATED ARTICLES
INVESTING

Debt Ratio
The debt ratio divides a companys total debt by its total
assets to tell us how highly leveraged a company isin other
words, how much of its assets are financed by debt. The debt
component ...
INVESTING BASICS

Will Corporate Debt Drag Your Stock Down?

Borrowed funds can mean a leg up for companies or the boot
for investors. Find out how to tell the difference.

FUNDAMENTAL ANALYSIS

Ratio Analysis Tutorial

If you don't know how to evaluate a company's present
performance and its possible future performance, you need
to learn how to analyze ratios.

INVESTING BASICS

Analyze Investments Quickly With Ratios

Make informed decisions about your investments with these easy equations.

http://www.investopedia.com/terms/d/debtratio.asp

3/5

7/26/2015

DebtRatioDefinition| Investopedia

INVESTING BASICS

Reading The Balance Sheet

Learn about the components of the statement of financial
position and how they relate to each other.

BONDS & FIXED INCOME

Evaluating A Company's Capital Structure

Learn to use the composition of debt and equity to evaluate
balance sheet strength.

BONDS & FIXED INCOME

The Fundamental Mechanics Of Investing

Here's a story that demonstrates why stocks and bonds were
created and how they are valued.

TRADING STRATEGIES

Introduction to Types of Trading: Fundamental

Traders
Learn about the different traders and explore in detail the
broader approach that focuses on company-specific events.

INVESTING

Debt Reckoning
Learn about debt ratios and how to use them to assess a
company's financial health. You could save a lot of money!

CREDIT & LOANS

Debt Ratios
Learn about the debt ratio, debt-equity ratio, capitalization
ratio, interest coverage ratio and the cash flow to debt ratio.

YOU MAY ALSO LIKE

DICTIONARY: #

CONTENT LIBRARY
Articles

Terms

Tutorials

Stock Simulator

Slideshows
FXtrader

FAQs

Calculators

Exam Prep Quizzer

Chart Advisor

Stock Analysis

Net Worth Calculator

WORK WITH INVESTOPEDIA

License Content

CONNECT WITH INVESTOPEDIA

Videos

Free Annual Reports

Symbol

SearchSearch

Search Investopedia

Advertise With Us

Write For Us

http://www.investopedia.com/terms/d/debtratio.asp

Email Deployment

Contact Us

Careers

INV Sweden

Sign Up for Our Free Newsletters!

Subscribe

4/5

7/26/2015

DebtRatioDefinition| Investopedia

2015, Investopedia, LLC. All Rights Reserved Terms Of Use Privacy Policy

http://www.investopedia.com/terms/d/debtratio.asp

5/5