What is the debt ratio? (2024)

FAQs

What is the debt ratio? ›

If your debt ratio does not exceed 30%, the banks will find it excellent. Your ratio shows that if you manage your daily expenses well, you should be able to pay off your debts without worry or penalty. A debt ratio between 30% and 36% is also considered good.

In general, many investors look for a company to have a debt ratio between 0.3 and 0.6. From a pure risk perspective, debt ratios of 0.4 or lower are considered better, while a debt ratio of 0.6 or higher makes it more difficult to borrow money.

Debt-to-income ratio of 36% or less

With a DTI ratio of 36% or less, you probably have a healthy amount of income each month to put towards investments or savings. Most lenders will see you as a safe bet to afford monthly payments for a new loan or line of credit.

Interpreting the Debt Ratio

If the ratio is over 1, a company has more debt than assets. If the ratio is below 1, the company has more assets than debt. Broadly speaking, ratios of 60% (0.6) or more are considered high, while ratios of 40% (0.4) or less are considered low.

The lower the debt ratio is, the better position they're in to handle the debt load. Not only does this mean a lower level of financial risk, it could also mean that the company is more financially stable. A comfortable debt ratio is below 0.50 or 50% but again, it all depends on what the industry average is.

Key takeaways

A good debt-to-income ratio is less than or equal to 36%. Any debt-to-income ratio above 43% is considered to be too much debt.

Lenders prefer bad debt to sales ratios under 0.4 or 40%. However, most companies prefer to have much lower numbers than this. Unless you have no bad debt, there is room to improve.

Key Takeaways

A debt ratio of greater than 1.0 or 100% means a company has more debt than assets while a debt ratio of less than 100% indicates that a company has more assets than debt.

In general, a ratio around 0.3 to 0.6 is where many investors will feel comfortable, though a company's specific situation may yield different results.

Alphabet(Google) (GOOGL) Debt-to-Equity : 0.10 (As of Mar. 2024)

How much debt is healthy? ›

Ideally, financial experts like to see a DTI of no more than 15 to 20 percent of your net income. For example, a family with a $250 car payment and $100 of monthly credit card payments, and $2,500 net income per month would have a DTI of 14 percent ($350/$2,500 = 0.14 or 14%).

- Use the following formula to calculate the interest coverage ratio: Interest Coverage Ratio = EBIT / Interest Expenses The interest coverage ratio helps determine if a company has too much debt by providing insight into its ability to service its debt obligations.

The 28/36 rule for housing expenses says that no more than 28% of your gross monthly income should go to your housing payment (like rent or mortgage payment) and no more than 36% of your gross income to paying total debt, such as your loans and credit cards.

High debt ratio: If the result is a big number (like 0.7 or 70%), it means the company owes a lot compared to what it owns. This could be risky.

A debt-to-equity ratio of 1.5 would indicate that the company in question has $1.50 of debt for every $1 of equity. To illustrate, suppose the company had assets of $2 million and liabilities of $1.2 million. Since equity is equal to assets minus liabilities, the company's equity would be $800,000.

DTI is one factor that can help lenders decide whether you can repay the money you have borrowed or take on more debt. A good debt-to-income ratio is below 43%, and many lenders prefer 36% or below. Learn more about how debt-to-income ratio is calculated and how you can improve yours.

Generally, a lower ratio is better, as it implies that the company is in less debt and is less risky for lenders and investors. A debt-to-equity ratio of 0.5 or below is considered good.