We are independent & ad-supported. We may earn a commission for purchases made through our links.

Advertiser Disclosure

Our website is an independent, advertising-supported platform. We provide our content free of charge to our readers, and to keep it that way, we rely on revenue generated through advertisements and affiliate partnerships. This means that when you click on certain links on our site and make a purchase, we may earn a commission. Learn more.

How We Make Money

We sustain our operations through affiliate commissions and advertising. If you click on an affiliate link and make a purchase, we may receive a commission from the merchant at no additional cost to you. We also display advertisements on our website, which help generate revenue to support our work and keep our content free for readers. Our editorial team operates independently from our advertising and affiliate partnerships to ensure that our content remains unbiased and focused on providing you with the best information and recommendations based on thorough research and honest evaluations. To remain transparent, we’ve provided a list of our current affiliate partners here.

What is Involved in Calculating Debt Ratios?

By C. Daw
Updated May 17, 2024
Our promise to you
WiseGEEK is dedicated to creating trustworthy, high-quality content that always prioritizes transparency, integrity, and inclusivity above all else. Our ensure that our content creation and review process includes rigorous fact-checking, evidence-based, and continual updates to ensure accuracy and reliability.

Our Promise to you

Founded in 2002, our company has been a trusted resource for readers seeking informative and engaging content. Our dedication to quality remains unwavering—and will never change. We follow a strict editorial policy, ensuring that our content is authored by highly qualified professionals and edited by subject matter experts. This guarantees that everything we publish is objective, accurate, and trustworthy.

Over the years, we've refined our approach to cover a wide range of topics, providing readers with reliable and practical advice to enhance their knowledge and skills. That's why millions of readers turn to us each year. Join us in celebrating the joy of learning, guided by standards you can trust.

Editorial Standards

At WiseGEEK, we are committed to creating content that you can trust. Our editorial process is designed to ensure that every piece of content we publish is accurate, reliable, and informative.

Our team of experienced writers and editors follows a strict set of guidelines to ensure the highest quality content. We conduct thorough research, fact-check all information, and rely on credible sources to back up our claims. Our content is reviewed by subject matter experts to ensure accuracy and clarity.

We believe in transparency and maintain editorial independence from our advertisers. Our team does not receive direct compensation from advertisers, allowing us to create unbiased content that prioritizes your interests.

The steps that are involved in calculating debt ratios are to place specific aspects of the operating costs and incomes into a mathematical formula to come up with a percentage that reflects the overall debt of the company. These numbers are taken from specific areas on the accounting forms and placed into the formula in a specific order. The basic mathematical formula used in calculating debt ratios is the total debts divided by the total assets, or to use the second formula that is the total liabilities divided by the total assets. The number that is calculated is the total debt ratio of the company, which is used by investors and lenders to decide whether the company is a high or low risk. The lower the debt ratio is, the lower the risk is for the investor or lender.

The first number that has to be placed into the mathematical formula when calculating debt ratios is the total debt or total liabilities. This number can be calculated by the company accountant, or better yet, taken from the balance sheets that are produced on a quarterly basis. This number signifies the total amount of long and short term debts that the company has, including daily operating expenses such as payroll and utilities. This debt total will also include loans or tax payments that are due, as well as any large purchases or loans that have been acquired.

When calculating debt ratios, the second number that has to be considered is the total amount of assets that the company has. This number is also obtained from the balance sheets or through the accountant. This number will include liquid assets, as well as current and fixed assets. This means that all of the income, along with the value of property and equipment, and any other income received from other sources, will be added together to get the total assets.

It is an easy process to calculate the percentage as long as the records of the company are accurate and easy to obtain. Most of the time, calculating debt ratios will be accomplished by using the most current financial statements from the company, but in some instances the investor or lender will demand an updated percentage. When this happens, a new set of financial statements will be calculated and printed, giving the most up-to-date numbers available to complete an accurate debt ratio for them. The debt ratio is basically a mathematical equation that divides the debts by the assets in order to obtain a percentage that reflects how much debt the company is in.

WiseGEEK is dedicated to providing accurate and trustworthy information. We carefully select reputable sources and employ a rigorous fact-checking process to maintain the highest standards. To learn more about our commitment to accuracy, read our editorial process.

Discussion Comments

WiseGEEK, in your inbox

Our latest articles, guides, and more, delivered daily.

WiseGEEK, in your inbox

Our latest articles, guides, and more, delivered daily.