What does the debt ratio measure?

The debt ratio measures the total debt of a company in relation to its total assets. This financial metric provides insights into the level of leverage a company is employing and indicates how much of the company’s assets are financed by debt. A higher debt ratio suggests a greater dependence on borrowed funds to finance the company's operations, which could imply higher financial risk. Conversely, a lower debt ratio may indicate that a company is using less leverage and potentially has more financial stability.

When assessing a company's risk profile, understanding the debt ratio is crucial as it helps stakeholders evaluate the balance between debt and equity financing. This figure is often critical for creditors and investors who want to gauge the company’s financial health and ability to meet its obligations, as it highlights how effectively the company is managing its liabilities relative to its total asset base.