What is the debt ratio? (2024)

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What is the debt ratio? (1)

Having debts is not bad in itself. A mortgage or a car loan, for example, are debts. But the situation becomes more complicated if your debts exceed your ability to repay them. You are then “overleveraged.”


  • Whether it be “good” or “bad,” a debt is problematic when you are no longer able to pay it back on time.
  • By calculating the ratio between your income and your debts, you get your “debt ratio.” This is something the banks are very interested in.
  • A debt ratio below 30% is excellent. Above 40% is critical. Lenders could deny you a loan.

To avoid ending up in “overleveraged” situation, it’s important that you know and understand your debt ratio. We’ll explain what it is.

The debt ratio explained

The debt ratio is a measure that indicates the ratio of your income to your debts. Some also call it the “indebtedness ratio” or “debt load.”

The debt ratio measures the gross annual income required for monthly payments on all debts.

Every time you want to borrow from your bank, your debt ratio is calculated. The result is a picture of your finances. Specifically, it tells the bank whether you will theoretically be able to repay the loan you are applying for.

How do I calculate my debt ratio?

Calculating your debt ratio is simple: divide your total gross monthly debt payments by your gross monthly income. Which debts? Debts include what people call “good” debt—like your mortgage—and what is considered “bad” debt—like the balance on a credit card you used for a trip. Your total debts should include your car loan payment, your 36-month fridge loan payment, etc.

Here’s an easy-to-use tool to help you calculate your debt ratio.

What is the debt ratio? (2)

Do I need to worry about my debt ratio?

If your debt ratio does not exceed 30%, the banks will find it excellent. Your ratio shows that if you manage your daily expenses well, you should be able to pay off your debts without worry or penalty.

A debt ratio between 30% and 36% is also considered good.

It’s when you’re approaching 40% that you have to be very, very vigilant. With a threshold like that, you’re a greater risk to lenders. You may already be having trouble making your payments each month. As a result, lenders may deny you a car loan, a student loan or a mortgage, for fear that you won’t be able to pay them back.

What do I do if my debt ratio is over 40%?

You should see this as a wake-up call. This is probably a sign that your debts are taking up too much room in your finances. And, contrary to what many people believe, over-indebtedness is not just a “bad patch.” It’s a situation that can quickly become a spiral.

Fortunately, there are ways out of this. The important thing is to act quickly. Why not now?

Meet with one of our counsellors for free

Don’t ignore a debt problem that’s ruining your life. Let’s work together to help you regain control of your finances.


What is the debt ratio? (2024)


What is the debt ratio? ›

Interpreting the Debt Ratio

What is a good debt ratio ratio? ›

A debt ratio below 30% is excellent. Above 40% is critical. Lenders could deny you a loan.

What is the debt equity ratio answer? ›

What Is the Debt-to-Equity (D/E) Ratio? The debt-to-equity (D/E) ratio is used to evaluate a company's financial leverage and is calculated by dividing a company's total liabilities by its shareholder equity.

Which is the debt ratio? ›

The debt ratio is defined as the ratio of total debt to total assets, expressed as a decimal or percentage. It can be interpreted as the proportion of a company's assets that are financed by debt.

How do you calculate the debt ratio? ›

To calculate the debt-to-assets ratio, divide your total debt by your total assets. The larger your company's debt ratio, the greater its financial leverage. Debt-to-equity ratio : This is the more common debt ratio formula. To calculate it, divide your company's total debt by its total shareholder equity.

How much debt is acceptable? ›

Debt-to-income ratio is your monthly debt obligations compared to your gross monthly income (before taxes), expressed as a percentage. A good debt-to-income ratio is less than or equal to 36%. Any debt-to-income ratio above 43% is considered to be too much debt.

Is a debt ratio of 0.7 good? ›

High debt ratio: If the result is a big number (like 0.7 or 70%), it means the company owes a lot compared to what it owns. This could be risky.

What is the ideal current ratio? ›

What is the ideal current ratio? An ideal current ratio should be between 1.2 to 2, which indicates that the business has 2 times more current assets than liabilities to covers its debts. A current ratio below 1 means that the company doesn't have enough liquid assets to cover its short-term liabilities.

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.

What is a good quick ratio? ›

Generally speaking, a good quick ratio is anything above 1 or 1:1. A ratio of 1:1 would mean the company has the same amount of liquid assets as current liabilities. A higher ratio indicates the company could pay off current liabilities several times over.

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 a good long-term debt ratio? ›

What is a good long-term debt ratio? A long-term debt ratio of 0.5 or less is considered a good definition to indicate the safety and security of a business.

Why is debt ratio bad? ›

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.

Why do we calculate debt ratio? ›

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.

What does a debt ratio of 0.5 mean? ›

Debt Ratio = 0.50, or 50%

A company that has a debt ratio at this level has a perfect balance in its debt and equity funding and would also be considered a low risk for a potential financing source.

What is the debt-to-equity ratio for dummies? ›

Your ratio tells you how much debt you have per $1.00 of equity. A ratio of 0.5 means that you have $0.50 of debt for every $1.00 in equity. A ratio above 1.0 indicates more debt than equity.

Is a debt ratio of 50% good? ›

If you have a DTI ratio between 36% and 49%, this means that while the current amount of debt you have is likely manageable, it may be a good idea to pay off your debt. While lenders may be willing to offer you credit, a DTI ratio above 43% may deter some lenders.

Is 75% a good debt ratio? ›

A debt ratio below 0.5 is typically considered good, as it signifies that debt represents less than half of total assets. A debt ratio of 0.75 suggests a relatively high level of financial leverage, with debt constituting 75% of total assets.

Is 20% a good debt ratio? ›

DTI is one factor that can help lenders decide whether you can repay the money you have borrowed or take on more debt. A good debt-to-income ratio is below 43%, and many lenders prefer 36% or below. Learn more about how debt-to-income ratio is calculated and how you can improve yours.

Is a debt ratio below 1 good? ›

If the ratio is below 1, the company has more assets than debt. Broadly speaking, ratios of 60% (0.6) or more are considered high, while ratios of 40% (0.4) or less are considered low. However, what constitutes a “good debt ratio” can vary depending on industry norms, business objectives, and economic conditions.


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