Accounting is full of useful ratios that can give meaning to the figures on your balance sheet, and debt ratio is no different. Debt ratio tells you how much your company relies on debt to conduct business. Debt ratio is calculated by dividing total liabilities by total assets; however, if you only have your total liabilities and net worth, you can still perform this calculation.
Instructions
1 Use your net worth -- that is, your assets minus your liabilities -- to determine your assets. Plug your net worth and your liabilities into this equation and solve for your assets. Doing this enables you to simply add your liabilities and your net worth, giving you your total assets.
2 Divide your total liabilities by your total assets to determine your debt ratio. This essentially shows how much of your assets were purchased by incurring debt.
3 Evaluate the debt ratio you just determined. If the ratio is higher than 1:1, it's a sign that the company has more debt than assets, which can mean trouble if the business experiences a setback. A low debt ratio is generally a good thing, but a very low debt ratio means that the company may be missing out on opportunities because it's not using debt to build its business.
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