What is the total debt ratio?
The total debt ratio is to measure total debts compared to total assets. It can be used in many different fields, including measurement of personal financial debt and debt debts. Although the total debt ratio may be informative, it does not always provide a definitive forecast of prospects for a business or personal financial situation.
To find the total debt ratio, it is necessary to contribute the total debt and divide it by gross income in a given period. If a person has a debt of $ 40,000 (USD) and currently earns $ 20,000 per year, its total debt ratio would be 2: 1, which is sometimes explained as two dollars for each one dollar asset. Entrepreneurship, which has a debt of $ 50,000 in debt and $ 200,000 in the last year, would have a total debt ratio of 1:25 or $ 25 for assets for each debt dollar.
is sometimes too simplistic that a person or business with more assets than debts is in good financialm health, while one with more debts than assets is in poor health. Many debts such as student loans or mortgages are long -term debts to be paid for many years or even decades. The high overall debt ratio to assets becomes a problem only if the debtor does not earn sufficient income to pay off the debts according to the agreed schedule. A person with $ 100,000 in annual income and $ 200,000 in student loan debt may seem serious financial problems, but in fact it may be in an excellent position to make its monthly payment, thus slowing the debt ratio over time.
The high total debt ratio to assets can cause problems to borrow more money, as creditors must be reasonably sure that one can pay back the loan without any problems. For example, someone with a high student loan debt may have difficulty securing a housing loan, even if they earn enough money to cover the mortgage and the student loan. Evennky and credit institutions generally want to make sure that less than about 40% of the monthly or annual income of the person goes to repay of debts; This means that even if debtors comfortably pay 60% of their annual debt income, banks can consider them too risky to lend money due to their high overall debt ratio.
Total debt is sometimes used in investing to determine the level of business risk. A company with a high overall debt ratio is theoretically endangered by bankruptcy because they do not have enough assets at hand to pay off all debts at the same time. However, most companies have a significant debt, so investment risk is also considering related problems such as profitability and market prognosis. Business with assets far beyond debt may still fail if their product suddenly disappears in style, while business with a high total debt ratio can still be very profitable if they can make their payments and stay on the market. As in personal financing, the total ratio isIn fact, the company's debt only with a piece of financial puzzles, instead of the definitive description of the company's success.