What are common debt ratios used for?

Common debt ratios are primarily used for assessing debt levels within an entity, such as a municipality. These financial metrics provide insight into the proportion of a government's debt relative to its assets, revenues, or equity. They are crucial for evaluating how much debt an organization has incurred in relation to its financial capacity to manage that debt.

For instance, ratios such as debt-to-revenue, debt-to-assets, and debt service coverage ratios allow stakeholders, including management, investors, and rating agencies, to determine whether a government is over-leveraged or if it has a healthy balance between its revenues and debts. By analyzing these ratios, stakeholders can make informed decisions regarding public finance, investment opportunities, and potential future borrowing.

While improving credit ratings and gauging public opinion could be related to how an entity manages its debt, they are not direct uses of debt ratios. Increasing revenues, though crucial for overall financial health, is not a function of debt ratios either; instead, debt ratios focus specifically on understanding and managing existing debt levels.