Which of the following correctly represents the formula for the total debt ratio?

• A. Total Debt Ratio = \frac{Total Liabilities}{Total Assets}
• B. Total Debt Ratio = \frac{Total Equity}{Total Assets}
• C. Total Debt Ratio = \frac{Total Assets - Total Equity}{Total Assets}
• D. Total Debt Ratio = \frac{Total Assets}{Total Liabilities}

Answer: (A)

Verified step by step guidance

1. Step 1: Understand the concept of the Total Debt Ratio. It is a financial metric used to measure the proportion of a company's assets that are financed through liabilities. This helps assess the company's financial leverage and risk.
2. Step 2: Recall the formula for the Total Debt Ratio. The correct formula is Total Debt Ratio = \( \frac{\text{Total Liabilities}}{\text{Total Assets}} \). This formula indicates the percentage of assets funded by liabilities.
3. Step 3: Analyze the options provided in the problem. Compare each formula to the correct formula for the Total Debt Ratio. For example, \( \frac{\text{Total Equity}}{\text{Total Assets}} \) represents the equity ratio, not the debt ratio.
4. Step 4: Evaluate the formula \( \frac{\text{Total Assets} - \text{Total Equity}}{\text{Total Assets}} \). This is mathematically equivalent to \( \frac{\text{Total Liabilities}}{\text{Total Assets}} \), as Total Assets - Total Equity equals Total Liabilities.
5. Step 5: Confirm that the correct representation of the Total Debt Ratio is \( \frac{\text{Total Liabilities}}{\text{Total Assets}} \), and recognize that \( \frac{\text{Total Assets}}{\text{Total Liabilities}} \) is incorrect as it represents the inverse relationship.