Total debt ratio, more often called debt ratio, is a measure of a company's debt leverage. To calculate the debt ratio, you simply divide the total liabilities for the business at a given moment by the total assets.
Identify Total Liabilities
To calculate total liabilities, add the short-term and long-term liabilities together. If short-term liabilities are $60,000 and long-term liabilities are $140,000, for instance, total liabilities equal $200,000. If short-term liabilities are $30,000 and long-term liabilities are $70,000, total liabilities equal $100,000. If a financial report has already been prepared for a given period, you can also look at the total liabilities amount reported on the balance sheet.
Identify Total Assets
The debt ratio shows how much debt the business carries relative to its assets. To calculate total assets at a given point, add together the company's current assets, investments, intangible assets, property, plant and equipment and other assets. If current assets are $75,000 and investments and all other assets total $225,000, your total assets equal $300,000. A prepared balance sheet typically reports the final amount of total assets at a particular point.
Divide Total Liabilities by Total Assets
After you have the numbers for both total liabilities and total assets, set up a division formula with total liabilities divided by total assets. If total liabilities equal $100,000 and total assets equal $300,000, the result is 0.33. Expressed as a percentage, the total debt ratio is 33 percent. Alternatively, if total debt equals $200,000 and total assets equal $300,000, the result is 0.667 or 67 percent.
Interpreting the Ratio
Typically, a company should maintain a debt ratio no higher than 60 to 70 percent, according to financial reporting software provider Ready Ratios. A ratio higher than this suggests the company is highly debt leveraged, which makes it difficult to keep up with near-term and long-term debt payments. When the debt ratio is below 50 percent, the company finances a larger portion of its assets through equity. When the debt ratio is above 50 percent, debt finances more than half of assets.
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