Debt ratio
The debt ratio indicates how much of an asset base is financed by liabilities or debt. One common definition is total liabilities ÷ total assets × 100%; some contexts use only interest-bearing debt. State the definition used and compare like with like. The measure helps assess financial risk but must be considered with cash generation, repayment dates and asset quality.
Worked example
Total liabilities of $240,000 and total assets of $400,000 give a debt ratio of 60% on the total-liabilities basis.
Common mistake
Do not silently swap total liabilities for long-term borrowings, or compare this percentage with a gearing ratio using a different denominator.
Where it appears in your exams
| Qualification | Exam | Relationship | Period |
|---|---|---|---|
| ACCA | FA | Direct | September 2026–June 2027 |
| ACCA | K1 | Supporting | July 2027–August 2028 |
| FIA | FFA | Direct | September 2026–June 2027 |