The debt ratio tells us the proportion of assets financed with debt. A debt ratio of 0.50 means that debt finances half the assets. The higher the debt ratio the greater the pressure to pay interest and principal. The debt ratio is a measure of solvency. In general, a debt ratio of less than 30% suggest a company isn’t as efficient as it could be, whereas a ratio more than 75% , let’s say, suggests possible bankruptcy, if a company experiences a downturn in business. The debt ratio is calculated as total liabilities divided by total assets. It tells us what percentage of assets are financed with debt. On average, most debt ratios are around 60% as companies tend to finance more assets with debt than equity. This is mainly due to debt tax advantages. Interest expense is tax-deductible for businesses. Here is the asset section of a Balance Sheet. We’ll use the highlighted total assets to determine the debt ratio. And here’s the liabilities section of the Balance Sheet. We’ll use the highlighted total liabilities to determine the debt ratio. So for 2015, total liabilities divided by total assets gives us a debt ratio of 38.6%. In 2016, total liabilities divided by total assets gives us a debt ratio of 17.2%. These ratios are low, which is safe, because it means the company should be able to make its debt payments, even during economic downturns. But it also means this company isn’t as efficient or as profitable as it could be, because it is not using leverage to increase profits. To learn more about leverage, check out the video called “equity multiplier.”