1. What Is The Leverage Ratio Formula?

The Leverage Ratio measures a company's financial leverage by comparing its total debt to total equity. It indicates how much debt a company is using to finance its assets relative to the value of shareholders' equity.

2. How Does The Calculator Work?

The calculator uses the Leverage Ratio formula:

Where:

• \( \text{Total Debt} \) — Sum of all short-term and long-term debt obligations
• \( \text{Total Equity} \) — Total shareholders' equity (assets minus liabilities)

Explanation: The ratio shows the proportion of debt financing relative to equity financing in a company's capital structure.

3. Importance Of Leverage Ratio Calculation

Details: The Leverage Ratio is crucial for assessing a company's financial risk, solvency, and capital structure efficiency. It helps investors and creditors evaluate the company's ability to meet its debt obligations.

4. Using The Calculator

Tips: Enter total debt and total equity in the same currency units. Both values must be positive, and total equity cannot be zero. The result is expressed as a dimensionless ratio.

5. Frequently Asked Questions (FAQ)

Q1: What does a high leverage ratio indicate?
A: A high ratio indicates higher financial risk but potentially higher returns on equity. It suggests the company relies more on debt financing.

Q2: What is considered a good leverage ratio?
A: This varies by industry, but generally ratios below 2.0 are considered reasonable, while ratios above 3.0 may indicate excessive leverage.

Q3: How does leverage ratio differ from debt-to-equity ratio?
A: Leverage Ratio and Debt-to-Equity Ratio are often used interchangeably, as both measure the relationship between debt and equity financing.

Q4: Why is total equity in the denominator?
A: Total equity represents the owners' stake in the company and serves as a cushion against losses, making it the basis for comparing debt levels.

Q5: Can leverage ratio be negative?
A: No, since both debt and equity should be positive values. Negative equity would indicate serious financial distress.