What does the debt ratio measure?

The debt ratio measures the percentage of a company's total funds that are provided by creditors, indicating how much of a company's assets are financed through debt as opposed to equity. It is calculated by dividing total liabilities by total assets. A higher debt ratio suggests that a larger portion of the company's assets is financed through borrowing, which can signify higher financial risk but also the potential for greater returns on equity if the borrowed funds are used effectively.

This understanding is crucial for assessing a company's financial stability and risk profile. It lets stakeholders, such as investors and creditors, evaluate how effectively the company manages its financial obligations. Being aware of the balance between debt and equity financing is important for contractors as it impacts their ability to secure new projects and manage ongoing operations.