1. What is the Leverage Ratio?

The Leverage Ratio is a financial metric that measures the proportion of debt used in a company's capital structure relative to its equity. It indicates the level of financial leverage and risk associated with a company's operations.

2. How Does the Calculator Work?

The calculator uses the Leverage Ratio formula:

Where:

• \( \text{Debt} \) — Total debt or liabilities (currency)
• \( \text{Equity} \) — Total equity or shareholders' funds (currency)

Explanation: The formula calculates how much debt a company is using to finance its assets relative to the value of shareholders' equity.

3. Importance of Leverage Ratio Calculation

Details: The leverage ratio is crucial for assessing a company's financial health, risk profile, and ability to meet its financial obligations. It helps investors and creditors evaluate the company's capital structure and financial stability.

4. Using the Calculator

Tips: Enter the total debt and total equity amounts in the same currency units. Both values must be positive numbers, with equity greater than zero.

5. Frequently Asked Questions (FAQ)

Q1: What is considered a good leverage ratio?
A: A leverage ratio below 2.0 is generally considered healthy, though this varies by industry. Higher ratios indicate more debt and higher financial risk.

Q2: How does leverage ratio differ from debt-to-equity ratio?
A: The leverage ratio and debt-to-equity ratio are essentially the same calculation, both measuring the proportion of debt to equity in a company's capital structure.

Q3: What are the limitations of the leverage ratio?
A: The ratio doesn't account for the quality of assets, interest coverage, or cash flow generation. It should be used alongside other financial metrics for comprehensive analysis.

Q4: How often should leverage ratio be calculated?
A: It should be calculated regularly, typically quarterly or annually, to monitor changes in a company's financial structure and risk profile.

Q5: Can leverage ratio be negative?
A: No, since both debt and equity are positive values and equity must be greater than zero, the leverage ratio will always be a positive number.