How is the debt ratio calculated?

The debt ratio is a financial metric that measures the proportion of a company's total assets that are financed through debt. This is important for assessing a company's financial leverage and stability.

The correct method of calculation involves taking the total debt and dividing it by the sum of total debt and equity. This calculation reflects the company's reliance on debt as a source of financing in relation to its total capital structure. Specifically, this ratio highlights the percentage of the company's financing that comes from debt rather than equity, thus providing insights into the risk involved in the company's financing strategy.

In contrast, other options do not accurately represent the debt ratio. For instance, one option suggests dividing debt by total assets, which would calculate what proportion of the assets is financed by debt but would not provide insight into the company's overall capital structure. Another option suggests calculating equity in relation to total assets, which is not relevant to determining the debt ratio. Lastly, a combination of debt and equity does not provide a clear ratio of debt financing alone against its total capital. Therefore, using the correct calculation method, which is debt divided by the sum of debt plus equity, effectively yields the most accurate representation of a company's debt dependency relative to its financial structure.