Debt Ratio

The debt ratio measures the proportion of a company’s total liabilities to its total assets. It evaluates the degree to which a business is leveraging debt to finance its operations.

Formula:

Debt Ratio = Total Liabilities / Total Assets

Interpretation:

• Below 0.5: Lower financial risk.

• Above 0.5: Higher leverage, indicating greater reliance on debt.

Why It Matters:

• Assesses financial risk.

• Important for investors and lenders.

• Influences borrowing capacity.

Example:

A retail chain in the UAE with AED 15M in total liabilities and AED 25M in total assets has a debt ratio of 0.6, indicating moderate financial leverage.