What is Debt ratio?

The debt ratio (in halal screening) is a company's interest-bearing debt divided by its market capitalisation:

• Debt ratio = Interest-bearing debt ÷ Market capitalisation

Interest-bearing debt includes bank loans, issued bonds and other liabilities that carry interest. Non-interest liabilities (such as amounts owed to suppliers) are usually excluded. In the AAOIFI standard this ratio must be below 30%.

Why relative to market cap

This measures what share of the company's value relies on riba-based financing. It differs from a conventional metric like debt-to-equity: the denominator is market value, not book equity.

An important subtlety

Market capitalisation changes every day with the price. So even if a company doesn't take on a single extra dollar of debt, a falling share price raises the ratio and can push it over the limit. That is why some methodologies use an average market cap over several months, and some use total assets instead of market cap. The formula and threshold limitup uses are on the methodology page.

Limitations

Reports come out once a quarter, so the debt figure is always somewhat out of date. Standards can also differ on details such as whether lease obligations are included.

For information only, not a fatwa.