A leverage ratio is the amount of debt you have compared to your total assets. In this case, we’re looking at the amount of debt compared to the total assets. This ratio is often used as an indicator of financial health.
A high debt-to-assets ratio indicates that a company has more debt than it has cash. When a company has too much debt, it may struggle to pay back its loans.
- A debt-to-equity ratio of 1 means that the company has no debt and no equity.
- A debt-to-capital ratio of 0 means that the company has total debt but no equity.
- An asset-to-equity ratio of 1 means that the business owns everything.
- An asset-to equity ratio of 0 means that there is no money left over after paying off debts.
What Is Leverage Ratio?
A leverage ratio is a financial ratio that indicates the level of indebtedness incurred by a business entity.
- A high leverage ratio means that the business entity is highly leveraged.
- A low leverage ratio means that the entity is less leveraged.
Leverage Ratio Example
A company with total assets worth $100m, total debt of $50m, and total equity of only $50m. This means that the company has a debt-to-equity ratio of 1.5. This means that the equity accounts for 50% of the company’s total assets.