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Leverage Ratio

AnalyticsTrade Team
AnalyticsTrade Team Last updated on 26 Apr 2023

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Leverage Ratio

A leverage ratio is a financial metric used to measure the amount of debt a company has relative to its equity. It is calculated by dividing a company’s total liabilities by its total shareholders’ equity. The higher the leverage ratio, the more debt a company has relative to its equity, and the more risk it is taking on. Leverage ratios are used to assess a company’s financial health and its ability to meet its debt obligations.

History of Leverage Ratio

The concept of leverage ratios has been around since the early days of finance. In the 19th century, leverage ratios were used to measure the amount of debt a company had relative to its assets. In the 20th century, the focus shifted to measuring the amount of debt a company had relative to its equity. This shift was driven by the need to better understand the risk a company was taking on by taking on debt.

Today, leverage ratios are used by investors, lenders, and regulators to assess a company’s financial health and its ability to meet its debt obligations. Leverage ratios are also used to compare companies in the same industry and to assess the risk of investing in a particular company.

Comparison Table

Leverage Ratio Description
Debt-to-Equity Ratio Total liabilities divided by total shareholders’ equity
Debt-to-Asset Ratio Total liabilities divided by total assets
Interest Coverage Ratio Earnings before interest and taxes divided by interest expenses

Summary

A leverage ratio is a financial metric used to measure the amount of debt a company has relative to its equity. It is calculated by dividing a company’s total liabilities by its total shareholders’ equity. Leverage ratios are used to assess a company’s financial health and its ability to meet its debt obligations. For more information about leverage ratios, you can visit websites such as Investopedia, The Balance, and the SEC.

See Also

  • Debt-to-Equity Ratio
  • Debt-to-Asset Ratio
  • Interest Coverage Ratio
  • Return on Equity
  • Return on Assets
  • Debt Service Coverage Ratio
  • Current Ratio
  • Quick Ratio
  • Cash Ratio
  • Cash Flow Coverage Ratio

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