I n t e r a c t I v e t e X t foundations in Accountancy/ acca financial accounting (ffa/FA) bpp learning Media is an acca approved Content Provider

debt ratio

 is the ratio of a company's total debts to its total assets.   

Debt ratio = 

Total debts

Total assets

 

(a) 

Assets consist of non-current assets at their statement of financial position value, plus current 

assets. 

(b) 

Debts consist of all payables, whether they are due within one year or after more than one year. 

You can ignore long-term provisions. 

 

There is no absolute guide to the maximum safe debt ratio but, as a very general guide, you might regard 

50% as a safe limit to debt. In practice, many companies operate successfully with a higher debt ratio 

than this, but 50% is nonetheless a helpful benchmark. In addition, if the debt ratio is over 50% and 

getting worse, the company's debt position will be worth looking at more carefully. 

In the case of Furlong the debt ratio is as follows. 

 20X8 

20X7 

Total debts

Total assets

 = 





$  881,731 + 100,000

$1,870,630

 





$  912,456 + 100,000

$1,664,425

 

 

= 52% 

= 61% 

In this case, the debt ratio is quite high, mainly because of the large amount of current liabilities. 

However, the debt ratio has fallen from 61% to 52% between 20X7 and 20X8, and so the company 

appears to be improving its debt position. 

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CHAPTER 26  

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  INTERPRETATION OF FINANCIAL STATEMENTS