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Simple English definitions for legal terms
debt ratio
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A quick definition of debt ratio:
Debt ratio: This is a way to measure how much a company owes compared to how much it owns. It is calculated by dividing the total amount of money the company owes (both long-term and short-term) by the total value of everything the company owns. A low debt ratio means the company has been careful with its borrowing and may be able to borrow more in the future. This is also called the debt-to-total-assets ratio.
A more thorough explanation:
The debt ratio is a financial metric used to measure a company's level of debt. It is calculated by dividing a company's total liabilities (both long-term and short-term) by its total assets. A low debt ratio indicates that a company has conservative financing and is less risky for investors.
For example, if a company has $500,000 in total liabilities and $1,000,000 in total assets, its debt ratio would be 0.5 or 50%. This means that half of the company's assets are financed by debt.
A low debt ratio is generally considered favorable because it indicates that a company has a strong financial position and is less likely to default on its debt obligations. This can make it easier for the company to borrow money in the future if needed.