The debt ratio is a financial indicator that measures the ability of an individual, a business, or an entity to repay its debts. It is typically expressed as a percentage and provides an insight into the financial health of the entity in question. It is calculated by adding up the monthly housing costs (rent or mortgage payment and municipal and school taxes and heating) plus the monthly payment on personal debts and the car loan, divided by the individual’s gross monthly income. A good debt ratio is considered to be lower than 35%, meaning that less than 35% of the person’s gross income goes towards paying for housing expenses and debts. 40% and above is generally considered “at risk” by the lender. In this case, the loan may come with a higher interest rate, a demand for a guarantee, or simply be declined.
It can be calculated using our debt ratio calculator.
For businesses, this ratio provides an indication of the company’s ability to repay its debts. A high debt ratio might suggest that the company is heavily indebted, which can be a concern for investors and creditors. Conversely, a low ratio may suggest that the company is less reliant on debt to finance its operations.