Debt Ratio

The debt ratio divides liabilities by shareholders' equity. Equity of 100 with debt of 100 gives 100%; debt of 200 gives 200%. It shows how many times over the company is using other people's money.

Below 100% is generally considered stable and above 200% burdensome, but the benchmark shifts by sector. Banks, construction and airlines borrow heavily by nature, so a high figure is normal there. Compare within an industry.

Debt is not inherently bad. If the business earns more than the interest costs, borrowing to grow is rational and it lifts ROE. The question is whether the interest can still be paid when conditions turn.

So read it alongside interest coverage — operating profit divided by interest expense. Below 1 means earnings do not even cover the interest. A low debt ratio with poor coverage is still dangerous. When rates rise, heavily indebted companies feel it first: the same borrowings simply cost more to service.