A long-term solvency ratio which measures a company’s ability to meet its obligations over the long run. In other words, it is a financial coverage ratio that relates all debts of all maturities regardless of creditor to total assets. The following equation illustrates this:
Suppose the total assets and total equity of a company are $500,000 and $300,000, respectively. It follows that its total debt ratio is:
Total debt ratio= (500,000- 300,000)/ 500,000 = 0.4 times
This means the company relies on debt to the extent of 40% of its capital. Put another way, it has $0.4 in debt for every one dollar in assets.
