What is debt ratio

 

It is used to calculate how much risk a company has taken on.

A lower level of risk is preferred. It means that a more independent business is able to borrow less money and is thus more financially secure. These businesses will have low debt ratios (below 50%), which indicates that their majority of assets are fully owned (financed through their own equity, and not debt).

A business with high risks and high debt levels means it has taken on large amounts of risk. High debt ratios (above 50%) are often a sign that a company is "highly leveraged". This refers to the fact that most of its assets were financed with debt and not equity.

 

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