- The formula for determining debt ratio is simple: total debt divided by total assets. For example, if the net value of a company's assets is $100 and it owes $50, then its debt ratio is 0.5 (50/100).
- The higher a debt ratio, the riskier the company, assuming there are no other factors at play. If a company has a debt ratio of 1 then it owes as much as it is worth. If a company has a debt ratio of more than 1, that means it owes more than it is worth; if it were to go bankrupt tomorrow its creditors could not be paid in full.
- Remember that a debt ratio is just a rough indicator. There are a number of other indicators of a company's financial solvency like its sales records, its products' ability to compete in the market and a wide variety of other, sometimes intangible factors.
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