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The total debt ratio measures the long-term solvency of your business. It shows you how highly your business is leveraged, or in debt. The total debt ratio is calculated as:

Total debt ratio = Total debt ÷ Total assets

Just like the current ratio, you can express the total debt ratio in dollars or times. For example, if a business has a total debt of $12,673 and total assets of $9,412, its total debt ratio would be —

Total debt ratio = Total debt ÷ Total assets

= $12,673 ÷ $9,412 = 1.35 : 1

In other words, for every dollar you have in assets, the business has $1.35 in liabilities. You could also say that the business is leveraged 135 percent or that its assets cover its liabilities 0.74 times over ($9,412 ÷ $12,673).

In the case of the total debt ratio, you would want the result to be one or less. The lower the ratio, the less total debt the business has in comparison with its asset base.

The total debt ratio would be of interest to your long-term lenders. For example, if your business owned the plant in which it operates and the bank has loaned the business money by way of mortgage against the property, the bank would be very interested in the long-term health of your business. Highly leveraged businesses risk becoming insolvent and declaring bankruptcy.