1. What is the Leverage Ratio?

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 amount of 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 (USD)
• \( \text{Total Equity} \) — Total shareholders' equity (USD)

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

3. Importance of Leverage Ratio

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 USD. Both values must be positive, with total equity greater than zero for valid calculation.

5. Frequently Asked Questions (FAQ)

Q1: What is considered a good leverage ratio?
A: Generally, a ratio below 2.0 is considered healthy, but this varies by industry. Lower ratios indicate less financial risk.

Q2: 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.

Q3: What does a high leverage ratio indicate?
A: A high ratio suggests the company relies heavily on debt financing, which may indicate higher financial risk but potentially higher returns.

Q4: Can leverage ratio be negative?
A: No, since both debt and equity are positive values. However, if equity is negative, the ratio becomes meaningless.

Q5: How often should leverage ratio be calculated?
A: It should be calculated regularly, typically quarterly or annually, to monitor changes in the company's financial structure over time.