Debt Ratio

The Debt Ratio compares a company’s debt to assets. This allows the investor to see the long term perspective of a company.

(Total Debt) / (Total Assets)

If a company has a debt ratio above 1 it has more debt than assets. This makes it a bad investment for the long term. If the number is below 1 that means it has more assets then debt. This makes it a good long term investment.

This is the theory however. While it is important to understand that too much debt can be a bad thing for a company it is also important to understand that debt is not always bad. Borrowing money and accumulating debt can actually help a company grow because they have more money to invest in themselves.

This in turn can help the investors, as the company grows so does its stocks, income, and dividends.

But beware of ignoring this ratio too much. The more debt a company has the less profitable they probably are. If they are making a lot of money in the first place they probably wouldn’t need to borrow so much money.

If you don’t at least take the debt ratio into consideration you could risk investing in a company that will not last through the next recession. That is why in general you want to see the company which you are investing into have as little debt as possible.

Other Financial Indicators to Consider

There are plenty of other indicators out there to analyze a company.

Cash Flow Ratio - Looks at how much money a company makes

PE Ratio - Looks at the earnings of a company and the price of the stock

Diluted Earnings Per Share – Another way of measuring the EPS