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
• \( \text{Total Equity} \) — Total shareholders' equity including retained earnings

Explanation: This ratio shows the proportion of debt financing compared 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, debt management capabilities, and overall financial health. 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, 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, while ratios above 3.0 may indicate higher financial risk. However, optimal ratios vary by industry.

Q2: How does leverage ratio differ from debt-to-equity ratio?
A: Leverage ratio and debt-to-equity ratio are often used interchangeably, though some definitions may include additional components in leverage calculations.

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, leverage ratio cannot be negative as both debt and equity are positive values. A ratio of zero indicates no debt financing.

Q5: How often should leverage ratio be calculated?
A: It should be calculated regularly, typically quarterly or annually, to monitor changes in financial structure and risk exposure.