How is the debt ratio calculated?

The debt ratio is an important financial metric that indicates the proportion of a person's or entity's total assets that are financed through debt. It is calculated by dividing total liabilities by total assets. This ratio provides insight into the leverage of an individual or organization; a higher ratio suggests more reliance on borrowed funds, potentially indicating higher financial risk.

By understanding this calculation, individuals can better assess their financial health and make informed decisions regarding borrowing and spending. A debt ratio above 1 typically signals a concerning level of debt relative to assets, while a lower ratio suggests a more manageable level of debt.

In contrast, the other options represent different financial calculations. For instance, total income divided by total assets might provide insight into income generation efficiency, but it does not reflect the relationship between debt and assets. Similarly, total assets divided by total liabilities offers a reverse perspective on leverage, but it does not yield the debt ratio itself. Lastly, total debt payments divided by total income indicates the portion of income that goes toward servicing debt, which is a different metric aimed at assessing cash flow rather than overall leverage or debt position.