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Series : Ratio Analysis (11 th Post)
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This Ratio helps us to
understand a company Debt in relation to the Assets.The Ratio helps to identify
the overall level of financial risk the company is in along with the shareholders.It shows how much the company relies on debt to finance assets
The higher the ratio, the greater the risk
associated with the Company’s operation. A low debt ratio indicates
conservative financing with an opportunity to borrow in the future at no
significant risk.
There are two types
of liabilities - operational and debt. Operational liabilities includes balance sheet accounts, such as
accounts payable, accrued expenses, taxes payable, pension obligations, etc.
The Debt Liabilities includes notes
payable and other short-term borrowings, The term "debt" is used synonymous with total liabilities.
The optimal debt ratio
is determined by the same proportion of liabilities and equity as a
debt-to-equity ratio. If the ratio is less than 0.5, most of the company's
assets are financed through equity. If the ratio is greater than 0.5, most of
the company's assets are financed through debt.
Maximum normal value is
0.6-0.7. But it is necessary to take into account industry specific, explained
in the article about debt-to-equity ratio.
Formula: Debt Ratio % = Total Liabilities / Total Assets
Next Post on Ratio
Analysis: Debt Ratios :Debt Equity Ratio
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Having a good understanding of such ratios helps in understanding a company's performance. A quality fundamental analysis is must to decide how a stocks is going to perform in future. To perform well in commodity market traders can rely on usage of mcx tips .
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