What is the formula for the debt ratio?

• A. Total Liabilities ÷ Total Assets
• B. Current Assets ÷ Current Liabilities
• C. Total Assets - Total Liabilities
• D. Net Income ÷ Total Assets

Answer: (A)

The debt ratio measures how much of a company’s assets are financed with debt, showing the level of financial leverage. It is calculated by dividing total liabilities by total assets. This direct comparison of what is owed to what is owned captures long‑term solvency and risk: a higher ratio means more of the asset base is funded by debt, which can imply greater risk if earnings don’t keep up with obligations.

If you see the alternative options, they point to different concepts. Current assets divided by current liabilities is the current ratio, a liquidity measure of short-term ability to cover obligations. Total assets minus total liabilities gives equity, not a ratio. Net income divided by total assets is return on assets, a profitability metric. So the formula for the debt ratio is indeed total liabilities divided by total assets.