Which of the following is true about debt ratio? (2024)

Which of the following is true about debt ratio?

The correct answer is option d. It measures the percentage of a company's assets financed by debt. The debt ratio for a firm is computed by dividing the total debt by the total assets. Thus, it gives an idea about the percentage or proportion of total assets funded by the debt.

What is true about the debt ratio?

As it relates to risk for lenders and investors , a debt ratio at or below 0.4 or 40% is low. This shows minimal risk, potential longevity and strong financial health for a company. Conversely, a debt ratio above 0.6 or 0.7 (60-70%) is a higher risk and may discourage investment.

Which of the following statements is true regarding the debt ratio?

The correct answer is option d. It measures the percentage of a company's assets financed by debt. The debt ratio for a firm is computed by dividing the total debt by the total assets. Thus, it gives an idea about the percentage or proportion of total assets funded by the debt.

Which of the following is true for debt equity ratio?

Answer and Explanation: The answer is option A. As stated in the context, a debt to equity ratio that is higher than 1 indicates that a company's debt is greater than its totals equity. Consequently, higher debt indicates a greater financial risk to the company since having debt entails risk.

What is the debt ratio quizlet?

The debt ratio indicates the percentage of the total asset amounts stated on the balance sheet that is owed to creditors. A high debt ratio indicates that a corporation has a high level of financial leverage.

What is the rule for debt ratio?

A company's debt ratio can be calculated by dividing total debt by total assets. A debt ratio of greater than 1.0 or 100% means a company has more debt than assets while a debt ratio of less than 100% indicates that a company has more assets than debt.

What is an example of a debt ratio?

Let's say you have 600,000$ in total assets and 150,000$ in liabilities. To calculate the debt ratio, divide the liability (150,000$ ) by the total assets (600,000$ ). This results in a debt ratio of 0.25 or 25 percent.

Which of the following factors is assessed using debt ratio?

They rely on this metric to evaluate a company's risk profile and financial stability. By analyzing the debt ratio, analysts gain insights into the level of financial leverage and the potential impact of debt on the company's profitability and solvency.

What is the best explanation of debt-to-income ratio quizlet?

What is the best explanation of "debt-to-income" ratio? The ratio of how much money individuals owe in relation to how much money they make.

Is the higher debt ratio the lower the risk of default True or false?

The resulting number represents the proportion of a company's assets that are financed through long-term debt. A higher ratio indicates that a company is more heavily leveraged and has a greater risk of default. A lower ratio indicates that a company is less leveraged and has a lower risk of default.

Does debt ratio include equity?

The Debt to Equity ratio (also called the “debt-equity ratio”, “risk ratio”, or “gearing”), is a leverage ratio that calculates the weight of total debt and financial liabilities against total shareholders' equity. Unlike the debt-assets ratio which uses total assets as a denominator, the D/E Ratio uses total equity.

What is debt equity ratio (%)?

The debt-to-equity ratio (D/E ratio) shows how much debt a company has compared to its assets. It is found by dividing a company's total debt by total shareholder equity. A higher D/E ratio means the company may have a harder time covering its liabilities. A D/E can also be expressed as a percentage.

What is the meaning of debt to ratio?

Your debt-to-income ratio (DTI) is all your monthly debt payments divided by your gross monthly income. This number is one way lenders measure your ability to manage the monthly payments to repay the money you plan to borrow. Different loan products and lenders will have different DTI limits.

What are the most important debt ratios?

The debt-to-asset ratio, the debt-to-equity ratio, and the times-interest-earned ratio are three important debt management ratios for your business. They tell you how much of your company's operations are based on debt, rather than equity.

What if debt ratio is too high?

A high risk level, with a high debt ratio, means that the business has taken on a large amount of risk. If a company has a high debt ratio (above . 5 or 50%) then it is often considered to be"highly leveraged" (which means that most of its assets are financed through debt, not equity).

What is a bad debt ratio?

The bad debt to sales ratio represents the fraction of uncollectible accounts receivables in a year compared to total sales. For example, if a company's revenue is $100,000 and it's unable to collect $3,000, the bad debt to sales ratio is (3,000/100,000=0.03).

What is your current debt ratio?

To calculate your debt-to-income ratio, add up all of your monthly debts – rent or mortgage payments, student loans, personal loans, auto loans, credit card payments, child support, alimony, etc. – and divide the sum by your monthly income.

What is the formula for ratio?

If you are comparing one data point (A) to another data point (B), your formula would be A/B. This means you are dividing information A by information B. For example, if A is five and B is 10, your ratio will be 5/10. Solve the equation. Divide data A by data B to find your ratio.

How can I lower my debt ratio?

To do so, you could:
  1. Increase the amount you pay monthly toward your debts. Extra payments can help lower your overall debt more quickly.
  2. Ask creditors to reduce your interest rate, which would lead to savings that you could use to pay down debt.
  3. Avoid taking on more debt.
  4. Look for ways to increase your income.

What is a good debt-to-income ratio?

Your debt-to-income (DTI) ratio is how much money you earn versus what you spend. It's calculated by dividing your monthly debts by your gross monthly income. Generally, it's a good idea to keep your DTI ratio below 43%, though 35% or less is considered “good.”

What is a good total assets to debt ratio?

In general, a ratio around 0.3 to 0.6 is where many investors will feel comfortable, though a company's specific situation may yield different results.

What does debt-to-income ratio affect?

Simply put, it is the percentage of your monthly pre-tax income you must spend on your monthly debt payments plus the projected payment on the new home loan. Generally, the lower your debt-to-income ratio is, the more likely you are to qualify for a mortgage.

Which of the following ratios is used to determine one debt-to-income ratio?

The correct ratio used to determine one's debt-to-income ratio is 28/36.

Why is the debt ratio important?

A debt ratio is a tool that helps determine the number of assets a company bought using debt. The ratio helps investors know the risk they will be taking if they invest in an entity having higher debt used for capital building.

Is a higher debt ratio better or worse?

For lenders and investors, a high ratio means a riskier investment because the business might not be able to make enough money to repay its debts. If a debt to equity ratio is lower – closer to zero – this often means the business hasn't relied on borrowing to finance operations.


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