Company Debt Ratios Explained: A Beginner’s Guide to Financial Health and Halal Filters

Written by Haider Saleem
Journalist and Political Analyst | LinkedIn / X

Debt is often seen as a red flag, but it can help companies grow, manage costs, and expand. The key is knowing how much debt is too much – and that’s where debt ratios come in.

This article introduces two common ways to measure company debt:

1. What debt ratios are and how to calculate them
2. What counts as a “good” or “bad” ratio
3. How real companies like Meta and Starbucks use debt
4. Why debt ratios matter for halal investing
5. How tools like Musaffa help you assess this automatically

1. What Are Debt Ratios?

Debt ratios are financial tools that help investors understand how much of a company’s business is funded by borrowing.

They answer a simple question:

How dependent is this company on debt compared to what it owns or what investors have contributed?

There are two key ratios:

1) Debt-to-assets ratio

Shows what portion of a company’s total assets is financed by debt.
Formula: Total Liabilities ÷ Total Assets

2) Debt-to-equity ratio

Compares the company’s debt to shareholders’ equity (i.e., the net value of what owners have invested).
Formula: Total Liabilities ÷ Shareholders’ Equity

These figures are found on a company’s balance sheet. Shareholders’ equity is calculated as:

Total Assets – Total Liabilities

2. Why Debt Isn’t Always Bad

Many successful companies use borrowing to:

• Fund new products and services
• Expand operations
• Navigate slow sales periods

Debt becomes a problem when it’s unmanageable.

From a Shariah perspective, interest-bearing debt must stay within certain limits. For example, AAOIFI – a leading Islamic finance standard-setter – recommends that interest-bearing debt should not exceed 30% of a company’s market capitalisation.

Screening tools like Musaffa automatically apply this filter to help investors identify Shariah-compliant stocks.

3. What Is a “Good” Debt Ratio?

There’s no one-size-fits-all answer. Debt ratios vary by industry and business model. But here’s a general guide:

Debt-to-assets ratio

Range	Meaning
Under 30%	Very low risk, high financial strength
30–50%	Generally healthy
60% or higher	May indicate overleveraging

Debt-to-equity ratio

Range	Meaning
Under 1.0	Conservative use of debt
1.0 – 1.5	Moderate and often acceptable
Above 2.0	May be considered risky, especially in industries with typically low debt

Tip: Always compare debt ratios to other companies in the same industry. A ratio that looks “high” in tech may be normal in utilities or aviation.

4. Real-World Examples

Starbucks: Where debt can be strategic

Starbucks reported $15 billion in debt and $28 billion in total assets – a debt-to-assets ratio of ~53.6%.

That might seem high. But Starbucks leases stores, renovates them, installs equipment, and operates in a heavily regulated industry. In this context, the industry average was around 79% in 2022. Starbucks used debt to expand rapidly – and investors were comfortable with that level.

Meta: lean and liquid

Meta (formerly Facebook) had $26.59 billion in debt and $185.7 billion in assets = giving a debt-to-assets ratio of just 14.3%.

This conservative approach reflects the tech model. Meta doesn’t need to invest heavily in physical stores or manufacturing, and it generates large amounts of cash from digital platforms. Lower debt here means financial flexibility.These examples show that the right level of debt depends on what a company does – not just what it owes.

5. What Debt Ratios Tell You

Debt ratios can reveal:

• Risk – Can the company repay loans if interest rates rise?
• Stability – Is it borrowing to grow, or just to survive?
• Efficiency – Is it making smart use of borrowed funds?

It’s also important to note that too little debt may signal underperformance. If a company never borrows, it may be missing out on growth opportunities. Investors sometimes prefer companies that balance equity with manageable debt.

For halal investors, debt ratio checks are a starting point – not the final verdict. But they help narrow down which companies are worth deeper research.

6. Why Debt Ratios Matter for Halal Investing

One of the key financial filters in halal investing is the 30% interest-bearing debt threshold, based on AAOIFI guidelines. This standard helps ensure that:

• A company isn’t heavily reliant on riba (interest)
• Borrowing is used responsibly, not excessively
• Long-term obligations are financially sustainable

A company might pass business activity screens (e.g. no alcohol or gambling) but still fail due to excessive debt.Tools like Musaffa’s stock screener automatically apply this debt filter – along with others like non-halal revenue and cash holdings – so investors don’t have to do manual calculations.

7. Final Thoughts: A Tool, Not the Whole Picture

Debt ratios are just one lens through which to evaluate a company. They won’t tell you everything – like how profitable the company is, or whether its debt is long-term or short-term. But they’re easy to calculate, widely used, and helpful for identifying early red flags.

As you grow in your halal investing journey, understanding tools like the debt-to-assets ratio will help you read financial statements with more confidence – and make decisions that align with both your values and your financial goals.

Key Takeaways

• Debt ratios measure financial health and borrowing levels
• Compare within industries, not across them
• A debt-to-assets ratio below 50% is often considered healthy
• AAOIFI’s 30% rule is key for halal investment screening
• Use tools like Musaffa to automate your compliance checks
• Debt is not always bad – but too much debt can be a risk

Disclaimer: The content is for informational purposes only and does not constitute legal, investment or financial advice.
It is important to conduct your own research or consult with a financial or investment advisor. Past performance is not indicative of future results. All logos or brands are referenced for identification purposes only and do not constitute an endorsement of any kind. This information is accurate as of the date of publication and may not reflect recent changes. Access our comprehensive legal disclaimers at https://musaffa.com/disclaimer.