Debt Ratio

Liabilities divided by assets. The debt ratio is a good indicator of the extent to which a business is leveraged. The lower this number, the more conservative the firm and the less likely it is to be knocked for a loop in hard times. On the other hand, the judicious use of leverage can result in a higher return on assets -- in other words, increased profitability. Like so many ratios, this one varies depending on the industry a company is in. Generally, however, the debt of industrial firms should not exceed roughly two-thirds of equity, or a debt ratio of about 65 percent. This ratio tends to be higher in the transportation and utility industries.



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