The following few days we will focus on KPI (Liability side).

Debt Ratio: indicates the percentage of a company’s assets that are provided via debt

Formula: Total Liabilities / Total Assets

Importance:  Determines the financial risk of a company. A ratio greater than 1 indicates that a significant portion of the assets are funded with debt and that the company has a higher default risk. Therefore, the lower the ratio, the safer the company.

Note:

1. Good indicator to check if your customer has high default risk (ie can be used to determine whether he will be a good pay master).
2. As with any other ratios, this ratio should be evaluated over a period of time to access whether the company’s financial risk is improving or deteriorating or compared it with other industry average.

Next we shall learn the difference between this Debt Ratio vs Debt to Equity Ratio