Q:

# How do you calculate debt ratio?

A:

Calculate debt ratio by determining total debts and total assets and then dividing the former by the latter. A debt ratio is a comparison of the total debt of an individual or company to its total assets, expressed as a percentage.

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1. Calculate total debt

A company's total debt is normally listed on each period balance sheet statement. This amount is calculated by adding the sums of long-term debt and current debts together. If long-term debt is \$100,000 and short-term debt is \$50,000, total debt is \$150,000.

2. Determine total assets

The total assets are also normally shown on the periodic balance sheet. To derive the total assets amount, add total long-term assets to total current assets. If long-term assets equal \$200,000 and short-term assets equal \$50,000, the total assets are \$250,000.

3. Divide total debt by total assets

Divide the total debt by the total assets. The result is the debt ratio. For example, if the total debt equals \$150,000 and the total assets equal \$250,000, the debt ratio is \$150,000 divided by \$250,000, which is 0.6, or 60 percent. This ratio means that 60 percent of the assets of a company are leveraged by debt. While this ratio is relatively high, the significance of a particular ratio depends on the norm within an industry.

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