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Leverage Ratio Formula:
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The Leverage Ratio is a financial metric that measures the degree to which a company or individual is utilizing borrowed money. It compares total debt to equity and indicates the financial risk associated with the capital structure.
The calculator uses the Leverage Ratio formula:
Where:
Explanation: The ratio shows how much debt a company has relative to its equity. A higher ratio indicates more leverage and higher financial risk.
Details: The Leverage Ratio is crucial for assessing financial health, determining creditworthiness, evaluating investment risk, and making strategic financial decisions. It helps investors and creditors understand the company's debt burden and financial stability.
Tips: Enter debt and equity amounts in USD. Both values must be positive numbers, with equity greater than zero to avoid division by zero errors.
Q1: What is considered a good Leverage Ratio?
A: Generally, a ratio below 2.0 is considered healthy, but this varies by industry. Ratios above 3.0 may indicate high financial risk.
Q2: How does Leverage Ratio differ from Debt-to-Equity Ratio?
A: They are essentially the same metric, both measuring the relationship between debt and equity in a company's capital structure.
Q3: Why is high leverage considered risky?
A: High leverage increases financial risk because it requires regular interest payments and principal repayments, which can strain cash flow during economic downturns.
Q4: Can Leverage Ratio be negative?
A: No, since both debt and equity are typically positive values. However, if equity is negative (indicating accumulated losses), the ratio becomes negative.
Q5: How often should Leverage Ratio be calculated?
A: It should be monitored regularly, typically quarterly or annually, as part of financial analysis and risk assessment processes.