1
$\begingroup$

Investopedia has a definition about Debt ratio, I do not understand how come Debt ratio can be higher than 1. Because it means that equity is negative (because Total Assets=Debt+Equity).

enter image description here

$\endgroup$
0

2 Answers 2

0
$\begingroup$

Equity can be negative when a firm accumulates losses and liabilities exceed the number of assets. In that case debt ratio can be bigger than 1.

$\endgroup$
0
$\begingroup$

You are righteously bewildered. Quote "A ratio greater than 1 shows that a considerable amount of a company's assets are funded by debt, which means the company has more liabilities than assets." clearly does NOT show that what's meant by the authors is the "D/E ratio". The link you give shows that they do not deal with the issue of default. They do not explain about the definition of default, but explain about leverage of debt. D/E stands for "Debt/Equity ratio" - debt/ASSETS, just as you say, used in strict meaning, defines the criteria of default and bankruptcy. Thus, the term "assets" should cautiously be used when explaining to laymen. I had the same misunderstanding. In German, e.g. there is "Fremdkapital/Eigenkapital" - it's "capital" only, not assets and/or equity ("assets" on the left, "equity" to the right, on the sheet).

New contributor
Peter Bernhard is a new contributor to this site. Take care in asking for clarification, commenting, and answering. Check out our Code of Conduct.
$\endgroup$

Your Answer

By clicking “Post Your Answer”, you agree to our terms of service and acknowledge you have read our privacy policy.

Not the answer you're looking for? Browse other questions tagged or ask your own question.