How to Evaluate Debt Ratios

Companies and individuals can analyze their debt ratios in order to gain a glimpse into their overall financial health. A debt ratio is a comparison of assets (what you own) to debts (what you owe). If an individuals has a debt ratio that is too high, he may not be able to get approval for certain loans or credit cards. If a company has more debts than it does assets, its financial situation can become precarious and cause potential investors to look elsewhere for investment opportunities.

Instructions

1

Figure the worth of your assets. Assets are anything that you own and can include items such as real estate, personal property and stocks or bonds. Add the value of all of these items.

2

Determine your debt. This is the sum of any amounts of money that you currently owe, such as a mortgage, student loans and credit card balances.

3

Divide your total debts (your answer from Step 2) by your total assets (your answer from Step 1) in order to determine your debt ratio. For instance, if your debts equal $100,000 and your assets equal $150,000, you would divide 100,000 by 125,000 to get a debt ratio of 0.8.

4

Evalute your debt ratio in terms of what is acceptable for your business' needs or your personal financial needs. If your ratio is more than one, you have more debts than assets, and you may need to re-evaluate your financial situation. If your debt ratio is less than one, you may be in a favorable financial standing, depending on the requirements of potential lenders or stockholders.