- What the ratio shows
- The formula
The debt ratio is total liabilities divided by total assets. It shows what share of a business's assets is financed by debt rather than by the owners. OpenStax calls it the debt-to-assets ratio and defines it as a ratio that "measures the portion of debt used by a company relative to the amount of assets". A result of 0.40, for example, means 40% of the assets are financed by debt. For the related ratio that compares debt with equity, see what is the debt-to-equity ratio. For short-term ability to pay, see what is liquidity.
Billed publishes this page. Definitions are quoted from the open textbook OpenStax Principles of Finance 2e (published June 24, 2026; pages revised July 6, 2026), opened on October 30, 2026.
What the ratio shows
OpenStax says: "The debt-to-assets ratio shows the relationship between debt and assets. It reflects how much of the assets of the business was financed through debt."
It's a solvency ratio. OpenStax says: "Solvency implies that a company can meet its long-term obligations and will likely stay in business in the future."
The formula
Debt ratio = (current liabilities + long-term liabilities) ÷ total assets
OpenStax says the ratio "includes all debt", meaning "both long-term debt and current liabilities". On the bottom of the fraction, it says: "The denominator for the debt-to-assets ratio is total assets, or total liabilities plus total equity."
Both figures come from the balance sheet on the same date. For what counts as a current or long-term liability, see what are liabilities in accounting.
Reading the result
- Below 1.0: part of the assets is financed by equity. In OpenStax's example, a 60% ratio "means that 60 percent of Clear Lake’s assets are financed by debt."
- Above 1.0: OpenStax says: "A ratio higher than 1.0 means the company has more debts than assets, which means it has negative equity."
OpenStax doesn't give a single target figure. For its example, it says: "Comparing Clear Lake’s ratio to industry averages would provide better insight."
Sample: one balance sheet date
The figures here are a sample, invented for this example. A design studio's balance sheet at December 31 shows:
- Current liabilities: $12,000
- Long-term liabilities: $18,000
- Total liabilities: $12,000 + $18,000 = $30,000
- Total assets: $75,000
- Debt ratio: $30,000 ÷ $75,000 = 0.40, or 40%
- Equity: $75,000 − $30,000 = $45,000, so $45,000 ÷ $75,000 = 0.60, or 60% of the assets, is financed by the owners.
The two shares add up to the whole: 0.40 + 0.60 = 1.00.
Related Articles
- What Is the Debt-to-Equity Ratio? Leverage for Small Businesses
- What Is Liquidity? Your Simple Guide to the Quick Ratio
- What Are Liabilities in Accounting? Current vs. Long-Term
Frequently Asked Questions
What is the debt ratio?
It's total liabilities divided by total assets. OpenStax calls it the debt-to-assets ratio, which "measures the portion of debt used by a company relative to the amount of assets".
How do you calculate the debt ratio?
Add current and long-term liabilities, then divide by total assets. In this page's sample, $30,000 ÷ $75,000 = 0.40, or 40%.
What does a debt ratio above 1.0 mean?
OpenStax says: "A ratio higher than 1.0 means the company has more debts than assets, which means it has negative equity."
Is the debt ratio the same as the debt-to-equity ratio?
No. Both use total liabilities as the numerator, but the denominator differs. OpenStax says: "The denominator for the debt-to-assets ratio is total assets, or total liabilities plus total equity."
What is solvency?
OpenStax says: "Solvency implies that a company can meet its long-term obligations and will likely stay in business in the future."