Debt ratio
In one sentenceTotal liabilities divided by total assets, showing the part of the business's assets financed by other people's money rather than the owners' money.
Simply put
Every asset the business owns is financed either by the owners or by creditors such as suppliers and banks. This ratio tells you the creditors' share of that financing.
The higher it is, the greater the risk: larger obligations with fixed due dates, and less room to absorb a bad year. Banks look at it when studying a financing request.
Worked example
A contracting business has total assets of 2,000,000 SAR and total liabilities (suppliers, loans and accruals) of 1,200,000 SAR.
Total liabilities1,200,000 SAR
Total assets2,000,000 SAR
Debt ratio = 1,200,000 ÷ 2,000,00060%
Formula: Total liabilities ÷ total assets
Don't confuse it with
Debt-to-equity ratioHere the denominator is assets, and there it is equity: the same business has 60% here and 1.5 times there.