📘 What is it?

The Debt Ratio measures the proportion of a company’s assets that are financed through liabilities (debts).

🔍 Intuition:

It tells you how much of your stuff (assets) is paid for with borrowed money (liabilities).

A higher ratio means you're more leveraged (i.e., riskier) because:

• You’re more dependent on debt
• You may struggle to pay debts if your revenue drops

🔢 Real Company Example (From the Table)

• Costco: Current Year Debt Ratio = 0.66
  → 66% of Costco’s assets are funded by debt
  → Down from 0.70 two years ago (slightly less risky now)
• Walmart: Current Year Debt Ratio = 0.64
  → Slightly lower than Costco—less dependent on debt

🧠 Strategic Interpretation

A high debt ratio suggests:

• Greater financial risk
• Potential cash flow strain during downturns
• May deter conservative investors or lenders

A low debt ratio suggests:

• Strong financial cushion
• Room to borrow more if needed
• Often a sign of financial stability

However, context matters:

• Capital-intensive industries (airlines/utilities) often have higher ratios
• Tech firms might have low debt and still grow fast

✅ Summary

You’ve now completed the full Chapter 2 arc:

• You understand how to record, track, and summarize transactions
• You know how to build financial statements
• You can now interpret those statements using analytical tools like the debt ratio