Business Finance Homework Help

Compare low debt ratio to high debt ratio, and discuss which is more beneficial to a business.

Student Response: 

A debt ratio measures how much leverage a company has. The debt ratio compares the total debt and total assets. To calculate the debt ratio, you should divide total debt by total assets. If the ratio is greater than 1, it means that the company has more debt/liabilities than it does assets. If the ratio is high, it also tells us that the company is putting themself at risk and is not doing well financially. That being said, a low debt ratio is better than a high debt ratio. A company should want to have more assets than it does debt. It is more beneficial to have a low debt ratio because this means it owns more than it owes and is operating efficiently.