How is the Debt Ratio calculated?

The correct method to calculate the Debt Ratio is by taking total liabilities and dividing that by total assets. This ratio provides insight into a company's financial leverage and overall financial health. It tells stakeholders what portion of a company’s assets is financed through debt. A higher debt ratio indicates that a larger portion of the company’s assets are financed by debt, which could imply higher financial risk if the company struggles to meet its obligations.

This calculation is significant for assessing a company's reliance on debt financing versus equity financing. It allows investors and creditors to evaluate how much of the company is owned outright versus how much is owed to creditors. In this context, the other options reflect different financial ratios or components that do not relate to the debt ratio specifically. The debt-to-equity ratio, for example, looks at the relationship between liabilities and equity, but it is not the same as the debt ratio.