We are independent & ad-supported. We may earn a commission for purchases made through our links.
Advertiser Disclosure
Our website is an independent, advertising-supported platform. We provide our content free of charge to our readers, and to keep it that way, we rely on revenue generated through advertisements and affiliate partnerships. This means that when you click on certain links on our site and make a purchase, we may earn a commission. Learn more.
How We Make Money
We sustain our operations through affiliate commissions and advertising. If you click on an affiliate link and make a purchase, we may receive a commission from the merchant at no additional cost to you. We also display advertisements on our website, which help generate revenue to support our work and keep our content free for readers. Our editorial team operates independently of our advertising and affiliate partnerships to ensure that our content remains unbiased and focused on providing you with the best information and recommendations based on thorough research and honest evaluations. To remain transparent, we’ve provided a list of our current affiliate partners here.

What is a Total Debt Ratio?

Jessica Ellis
Updated May 16, 2024
Our promise to you
SmartCapitalMind is dedicated to creating trustworthy, high-quality content that always prioritizes transparency, integrity, and inclusivity above all else. Our ensure that our content creation and review process includes rigorous fact-checking, evidence-based, and continual updates to ensure accuracy and reliability.

Our Promise to you

Founded in 2002, our company has been a trusted resource for readers seeking informative and engaging content. Our dedication to quality remains unwavering—and will never change. We follow a strict editorial policy, ensuring that our content is authored by highly qualified professionals and edited by subject matter experts. This guarantees that everything we publish is objective, accurate, and trustworthy.

Over the years, we've refined our approach to cover a wide range of topics, providing readers with reliable and practical advice to enhance their knowledge and skills. That's why millions of readers turn to us each year. Join us in celebrating the joy of learning, guided by standards you can trust.

Editorial Standards

At SmartCapitalMind, we are committed to creating content that you can trust. Our editorial process is designed to ensure that every piece of content we publish is accurate, reliable, and informative.

Our team of experienced writers and editors follows a strict set of guidelines to ensure the highest quality content. We conduct thorough research, fact-check all information, and rely on credible sources to back up our claims. Our content is reviewed by subject-matter experts to ensure accuracy and clarity.

We believe in transparency and maintain editorial independence from our advertisers. Our team does not receive direct compensation from advertisers, allowing us to create unbiased content that prioritizes your interests.

Total debt ratio is a measurement of total debts compared to total assets. It can be used in many different fields, including to measure personal financial debt and the debts of a business. While total debt ratio can be informative, it does not always give a definitive forecast of the prospects of a business or personal finance situation.

To find a total debt ratio, it is necessary to add up total debt and divide it by gross income over a given period. If a person has $40,000 US dollars (USD) in debt and currently makes $20,000 USD per year, his or her total debt ratio would be 2:1, which is sometimes explained as having two dollars of debt for every one dollar of assets. A business that has $50,000 USD in debt and an income of $200,000 USD over the past year would have a total debt ratio of 1:25, or $25 in assets for every one dollar of debt.

It is sometimes overly simplistic to say that a person or business with more assets than debts is in good financial health, while one with more debts than assets is in bad health. Many debts, such as student loans or mortgages, are long-term debts meant to be paid off over many years or even decades. A high total debt to asset ratio becomes an issue only if the debtor does not make enough income to pay off debts on an agreed schedule. A person with $100,000 USD in yearly income and $200,000 in student loan debt may appear to be in serious financial trouble, but in fact may be in an excellent position to make his or her monthly payment, thereby slowly reducing the debt ratio over time.

A high total debt to asset ratio can cause problems when trying to borrow more money, since lenders need to be reasonably sure that a person can pay a loan back without problems. Someone with high student loan debt, for instance, may have difficulty securing a home loan even if he or she makes enough money to cover both mortgage and student loan payments. Banks and lending institutions generally want to make sure that less than about 40% of a person's monthly or yearly income goes to paying off debts; this means that, even if borrowers are comfortable paying 60% of their yearly income on debt, banks may consider them too risky to loan money to because of their high total debt ratio.

Total debt is sometimes used in investing to determine the risk level of a business. A company with a high total debt ratio is theoretically in danger of bankruptcy, since they do not have enough assets on hand to pay off all debts at once. Most companies, however, do carry considerable debt, so investment risk also considers related issues such as profitability and market forecast. A business with assets far in excess of debt can still fail if their product suddenly goes out of style, whereas a business with a high total debt ratio may still be extremely profitable so long as they can make their payments and remain competitive in the market. As in personal finance, the total debt ratio of a business is really only a piece of the financial puzzle, instead of a definitive description of the company's success.

SmartCapitalMind is dedicated to providing accurate and trustworthy information. We carefully select reputable sources and employ a rigorous fact-checking process to maintain the highest standards. To learn more about our commitment to accuracy, read our editorial process.
Jessica Ellis
By Jessica Ellis
With a B.A. in theater from UCLA and a graduate degree in screenwriting from the American Film Institute, Jessica Ellis brings a unique perspective to her work as a writer for SmartCapitalMind. While passionate about drama and film, Jessica enjoys learning and writing about a wide range of topics, creating content that is both informative and engaging for readers.
Discussion Comments
Jessica Ellis
Jessica Ellis
With a B.A. in theater from UCLA and a graduate degree in screenwriting from the American Film Institute, Jessica Ellis...
Learn more
SmartCapitalMind, in your inbox

Our latest articles, guides, and more, delivered daily.

SmartCapitalMind, in your inbox

Our latest articles, guides, and more, delivered daily.