What is a Leverage Ratio?

Leverage Ratio Definition

A leverage ratio is used to show the capital structure of the business and in particular the level of debt in relation to owners equity. A business with a high level of debt is considered to be more risky but will give greater returns to the owners provided cash and profit are managed correctly.

Popular Leverage Ratio List

A selection of popular leverage ratios from the mdct.ru Ratios Guide.

Leverage Ratio Analysis

A leverage ratio shows how the assets of a business are being funded and whether interest payments on the debt can be covered by the profits of the business.There is no correct value for a leverage ratio, it all depends on the type of business and the industry in which it operates in

A financial leverage ratio should not be viewed in isolation but looked at over a period of time using trend analysis and in comparison to other businesses in your industry.

In addition, in order to give a full picture of what is happening, they should be viewed relative to other ratios calculated for the business such as liquidity ratios, profitability ratios, efficiency ratios, activity ratios, and investor ratios.

The leverage ratio will vary from industry to industry, so it is important to make comparisons to similar businesses in your sector. A business with a high level of debt is said to be highly leveraged. A high level of debt is not necessarily a bad thing, if the return on the debt is greater than the interest on it, the owners will benefit.

Leverage Ratio Formula

There are numerous examples of leverage ratios, however, it is important to select the key ratios which relate to your business. The industry sector, size, and complexity of the business will determine the most appropriate ratios to use and many may not be relevant or worth calculating, particularly for a small business.

The following list of leverage ratios are a useful starting point.

Leverage Ratio Leverage Ratio Formulas
Gearing Ratio Debt / (Debt + Equity) x 100%
Debt Equity Ratio Debt / Equity
Interest Cover Profit before Interest and Tax / Interest

What is a Leverage Ratio? November 6th, 2016Team

You May Also Like

Related pages

excel formula for npvcash payback formulamaterials requisitioned journal entryformula for dividend payout ratiogeneral ledger sampleinvestment in preferred stock on balance sheetdepreciation expense journal entryaccounts payable debit balancedu pont charthow to calculate payback periodcalculate future value annuityhow to record capital leasereceivables ledgercalculation for markupprofit percentage formula in excelpetty cash journal entryamortization of bond discountincome tax provision journal entrymirr financial calculatortotal asset turnover exampleinternal controls accounts receivablevariable manufacturing overhead formuladebtor definition accountingfifo calculation formulacontribution sales ratiooverstatement examplescash accounting versus accrual accountingbank reconciliation excel spreadsheetwebsite intangible assetcash voucher sample formatoverappliedfuture value interest factor of annuitygoal seek effective interest ratehow to calculate the acid test ratiosunk cost definitiongearing leverage ratioaverage payment period ratio formulahow to calculate dsoamortization table calculationhow to calculate depreciation expense from accumulated depreciationoperating cash flow calculatordefine acid test ratioamortization schedule exampleformula for horizontal analysisformula for inventory turnsimprest cash accountpresent value of annuity charttrial balance and balance sheet examplediscounted payback period calculator onlinepetty cash reconciliation form templateformula roatvm solver online calculatorreceivables turnover ratio calculatorunearned revenue earned journal entrydiminishing method depreciationfixed asset register template downloadleasehold premises in accountingconverting effective interest rate to nominalleverage gearing ratiowhat is the normal balance of an asset accountconsumables accountingacid quick ratioallocation of factory overheadcontribution margin per unit definitioncash float sheetinsurance paid in advance journal entrywhat type of account is sales returns and allowancesaccounting equation worksheet templateroce formulaaccount receivable days calculationjournal entry for issuing sharescauses of labour rate variancepension journal entrieseac calculatorfuture value of annuity due table