DEBT RATIO
Debt Ratio - a financial ratio that measures the proportion of
total assets provided by debt - both long term and current. The
calculation is total debt (the sum of current liabilities and
long-term liabilities) divided by (the sum of current assets, fixed
assets, and other assets such as 'goodwill')
Debt Ratio = Total Liabilities / Total Assets
Used with other financial analytics, the debt ratio can help
investors determine a company's level of risk.
Companies with high debt ratios are said to be "highly leveraged". A
Company with a high debt ratio is very sensitive to changes in
operations. Increases and decreases in profits / cash flow are
magnified. A drop in cash flow from operations in a highly leverage
company may result in the company not being able to service its debt
and creditors could start to demand repayment of debt.
Like all financial ratios, a company's debt ratio should be compared
with their industry average or other competing firms.
Example: American International Group (AIG)
Fiscal Year Ended
12/31/08
12/31/07
12/31/06
Total Liabilities
$807,708,000
$964,704,000
$877,737,000
Total Assets
$860,418,000
$1,060,505,000
$979,414,000
Debt Ratio
93.8%
91.0%
89.6%
AIG is highly leveraged - and that is why they needed $80 billion of
our money