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Leverage Ratio Formula:
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The Leverage Ratio (LR) is a financial metric that measures the proportion of a company's debt relative to its total assets. It indicates the degree to which a company is financing its operations through debt versus owned funds.
The calculator uses the Leverage Ratio formula:
Where:
Explanation: The ratio shows what percentage of assets is financed by debt. A higher ratio indicates more leverage and higher financial risk.
Details: The leverage ratio is crucial for assessing a company's financial health, risk profile, and ability to meet debt obligations. It helps investors and creditors evaluate the company's capital structure and financial stability.
Tips: Enter total debt and total assets in USD. Both values must be positive numbers, with total assets greater than zero for valid calculation.
Q1: What is a good leverage ratio?
A: Generally, a ratio below 0.5 is considered low risk, 0.5-0.7 is moderate, and above 0.7 is high risk, though this varies by industry.
Q2: How does leverage ratio differ from debt-to-equity ratio?
A: Leverage ratio uses total assets as denominator, while debt-to-equity uses shareholders' equity. Both measure financial leverage but from different perspectives.
Q3: Why is high leverage considered risky?
A: High leverage increases interest expenses and the risk of default during economic downturns or when cash flow is insufficient to cover debt payments.
Q4: Can leverage ratio be greater than 1?
A: Yes, if total debt exceeds total assets, indicating the company may be in financial distress with negative net worth.
Q5: How often should leverage ratio be calculated?
A: It should be monitored quarterly for public companies and during financial reviews for private companies to track financial health trends.