Debt Ratio

Debt Ratio

Formula

$$\text{Debt ratio} = \frac{\text{Total liabilities}}{\text{Total assets}}$$

Explanation

• Shows what percentage of assets is financed by creditors
• Measures gearing / leverage and risk to creditors

Satisfactory level

• Lower ratio = safer for creditors.
• Very high debt ratio → higher bankruptcy risk, especially in recession.

Industry norm

• Many firms lie somewhere around 40–60%, but it varies with industry and strategy.
• Capital-intensive sectors often use more debt.

Example

• Total liabilities = RM3,000,000
• Total assets = RM6,000,000

$$\text{Debt ratio} = \frac{3,000,000}{6,000,000} = 0.5 = 50\%$$

Half of the assets are financed by debt.