The debt ratio is a percentage that indicates how leveraged a business is. Calculate a debt ratio by adding up all of the debts of a business, including long-term and short-term debts, and divide this total by the total assets of the business.
A high debt ratio indicates that a business has a large amount of debts compared to its assets, which can mean great financial risk. Some industries tend to have high debt ratios, because the businesses in these industries need more capital to run than businesses in other industries. When determining the financial health of a business using the debt ratio, it’s best to compare the ratios within an industry.