The meaning of debt ratio is the ratio that measures the relationship between the amount of funds that a company has with respect to the debts incurred in both the long and the short term.
The concept of debt ratio analyzes the financial appeceament, which is the proportion of debt that a company bears against its own resources.
How to calculate the debt ratio?
To calculate the debt ratio, the debts contracted by the company in the long and short term are taken into account, dividing it by the total liability (net worth plus current and non-current liabilities) and all this multiplied by 100 to obtain the percentage.
Therefore, the formula for the debt ratio is:
% of debt ratio = (Debt / Liabilities) x 100
It should be clarified that the debt ratio can be shown as a percentage and as a percentage. In either of the two cases, the calculations address the contributions of third parties in the total financial resources of the company.
Debt reveals the dependence of the company on third parties, so the debt ratio determines the ability of the company to be financially dependent on others such as banks or other companies.
The most appropriate debt ratio should be between 40 and 60%. In the event that it has a percentage lower than 40%, the company may incur an excess of idle capital, with the corresponding loss of profitability. For its part, when it exceeds 60%, the company will be supporting a significant volume of debt. This could lead to a decapitalization of society and a loss of autonomy from third parties.
Therefore, a low number implies that the company is less dependent on the leverage, that is, from the money it obtains from third parties.