The debt ratio of a business is one of many ratios that we use in valuation.
The total debt of a given business divided by it’s total assets is the debt ratio. For example: if your business has $478,000 in debt and $1,174,000, the debt ratio for your business is about .407/1 or 41%.
A potential investor may see this number as high or low and will factor that into his evaluation of the business. Some investors will not invest in a company that has more debt than assets, or a company with a debt ratio that is higher than 1.0.
For owners, this number is simply one indicator of the company’s financial health.
A simple application for you would be to calculate your personal debt ratio. If you have a similar ratio to the business above, I’d say that you’re doing alright!
Other related posts:
> Good debt versus bad debt
> How businesses deal with marginal costs and profits
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