Debt funds typically mean funds borrowed on which the borrower has to pay interest. Debt funds and owner's funds together constitute the capital available to a firm for deployment in business. The profit that remains after payment of interest (and taxes) is the amount available for distribution to the business owners.
Significance of Debt Ratios
Debt ratios check the financial structure of the business by comparing debt against total capital, against total assets and against owners' funds. A related ratio, interest coverage ratio, looks at the adequacy of profits to meet interest obligations. The ratios help check how "leveraged" a company is, and also the financial maneuverability of the company in difficult times. The concepts of leverage and other issues are examined below.