debt-to-earnings ratio

The debt-to-earnings ratio measures how much debt a person or business has compared to their income or earnings. It’s calculated by dividing total debt payments by annual earnings. A lower ratio indicates that earnings comfortably cover debt obligations, suggesting financial stability. Conversely, a higher ratio signals that debt consumes a larger portion of income, which can be a sign of financial strain and increased risk of default. This ratio is useful for lenders and borrowers to assess the sustainability of debt levels relative to income.