What does the debt ratio measure?

The debt ratio is a financial metric that measures the proportion of a company's total assets that are financed through debt. This ratio is calculated by dividing total liabilities by total assets, providing insight into how much of a company’s assets are funded by borrowing as opposed to equity.

A higher debt ratio indicates that a larger portion of asset financing comes from debt, which can imply increased financial risk, as the company has obligations to repay its creditors. Conversely, a lower debt ratio suggests a more conservative capital structure, indicating a reliance on equity financing. This measurement is essential for investors and analysts as it helps assess the company's financial leverage and overall risk exposure. Understanding this ratio is crucial for evaluating a company’s ability to manage its debts and stay financially solvent.