What is calculated as a firm's total liabilities divided by its total assets?

The debt ratio is defined as a firm's total liabilities divided by its total assets. This financial metric provides insights into a company's leverage and financial stability. By calculating the debt ratio, investors and analysts can assess the proportion of a firm's assets that are financed through debt, which can indicate the level of risk associated with the company. A higher debt ratio suggests that a larger portion of the company's assets are funded by debt, which might signify higher financial risk during economic downturns when revenues may fall. Conversely, a lower debt ratio implies that the company relies more on equity financing, which can be seen as a more conservative financial approach.

Understanding the debt ratio is crucial for evaluating a company’s financial health, as it helps in comparing the leverage across firms within the same industry and determining the potential for financial distress. This ratio is fundamental for making informed investment decisions and can influence a firm's credit rating and borrowing capacity.