Future Business Leaders of America (FBLA) Business Calculations Practice Test 2025 - Free FBLA Practice Questions and Study Guide

Question: 1 / 400

How is the debt ratio calculated?

Debt Ratio = Total Assets / Total Liabilities

Debt Ratio = Total Liabilities / Total Assets

The debt ratio is an important financial metric that assesses a company's financial leverage by comparing its total liabilities to its total assets. The correct method of calculation reflects how much of the assets are financed through debt.

When you take total liabilities and divide them by total assets, you obtain a clear picture of the proportion of assets that are covered by debt. A higher debt ratio indicates that a greater portion of the assets is financed through borrowing, which can signify higher financial risk. Conversely, a lower debt ratio suggests that a company is utilizing less debt to fund its assets and may be considered financially more stable.

This calculation is particularly valuable for investors and analysts when they want to gauge the risk involved in a company’s capital structure, informing decisions about investments, credit evaluations, and financial health assessments.

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Debt Ratio = Current Liabilities / Current Assets

Debt Ratio = Total Debts / Total Revenue

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