What is an Individual's Debt Ratio?

An individual's debt ratio indicates what percentage of his assets are financed by debt. The ratio is calculated by dividing total debt by total assets.

  1. Significance

    • A high debt ratio suggests you're increasingly unable to pay your bills, according to MSN's Money website, which says lenders might be less willing to loan money to people with a high debt ratio.

      Lenders avoid potential home buyers whose house payment--principal, interest, taxes and insurance--would exceed 28 percent of gross income, and whose overall debt ratio exceeds 36 percent of gross income, according to Lisa Smith of Investopedia.com.

      A high ratio is thought to be a warning that you should re-examine monthly expenses and cut costs where possible.

    Calculating Your Debt Ratio

    • In the home, if your ratio is 50 percent or more, U.S. News and World Report suggests immediately getting "professional help to aggressively reduce debt."

      Calculating your household's debt ratio is as simple as entering readily available details from your financial records into a website that does all the hard work.
      MSN's Money website includes a debt-ratio calculator (see Resource section) that requires information such as your monthly income before taxes, monthly housing costs, and other monthly payments, such as car note and credit card bills.

    Current Affairs

    • Many people witnessed the result of high debt ratio during the financial meltdown of 2008 and 2009: Many new home buyers took on more debt than they could handle, and that affected companies, lowering corporate asset values and making those companies' debt ratios skyrocket to unmanageable levels, Investopedia notes.

    "Generation Debt"

    • "Generation Debt," coined by author Anya Kamenetz, describes the young and educated who often find themselves in unmanageable debt. The designation goes to those with debt exceeding 8 percent of gross income, Investopedia notes. People can go deeply into debt because of student loans on highly priced colleges; mortgages; or simply by living beyond their means. For instance, today's world views automobiles and cell phones as needs, but that doesn't have to be the case.

    Business

    • A company's debt ratio can help people determine the risk level associated with investing in that company, according to Investopedia. The figure can't predict growth potential, but it can shed light on a balance sheet's durability.

    Balance Sheet

    • The balance sheet is a snapshot of the company's current assets, liabilities and shareholders' equity, according to Investopedia. It's aptly named because the formula, "assets=liabilities+shareholders' equity," shows that a company can pay for--or borrow to pay for--all its assets. The two sides of the formula effectively balance out.

      The "assets" side of the sheet includes cash, inventory and property; the other side includes accounts payable and long-term debt.

    Recession

    • Balance-sheet strength can give some indication as to whether a company can weather the economic storm when a recession or otherwise down economy looms, the site notes.

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References

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