# How to Calculate Total Debt Ratio

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Total debt ratio, more often called debt ratio, is a measure of a company's debt leverage. To calculate the debt ratio, you simply divide the total liabilities for the business at a given moment by the total assets.

## Identify Total Liabilities

To calculate total liabilities, add the short-term and long-term liabilities together. If short-term liabilities are \$60,000 and long-term liabilities are \$140,000, for instance, total liabilities equal \$200,000. If short-term liabilities are \$30,000 and long-term liabilities are \$70,000, total liabilities equal \$100,000. If a financial report has already been prepared for a given period, you can also look at the total liabilities amount reported on the balance sheet.

## Identify Total Assets

The debt ratio shows how much debt the business carries relative to its assets. To calculate total assets at a given point, add together the company's current assets, investments, intangible assets, property, plant and equipment and other assets. If current assets are \$75,000 and investments and all other assets total \$225,000, your total assets equal \$300,000. A prepared balance sheet typically reports the final amount of total assets at a particular point.

## Divide Total Liabilities by Total Assets

After you have the numbers for both total liabilities and total assets, set up a division formula with total liabilities divided by total assets. If total liabilities equal \$100,000 and total assets equal \$300,000, the result is 0.33. Expressed as a percentage, the total debt ratio is 33 percent. Alternatively, if total debt equals \$200,000 and total assets equal \$300,000, the result is 0.667 or 67 percent.

## Interpreting the Ratio

Typically, a company should maintain a debt ratio no higher than 60 to 70 percent, according to financial reporting software provider Ready Ratios. A ratio higher than this suggests the company is highly debt leveraged, which makes it difficult to keep up with near-term and long-term debt payments. When the debt ratio is below 50 percent, the company finances a larger portion of its assets through equity. When the debt ratio is above 50 percent, debt finances more than half of assets.

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