A leverage ratio measures a company's financial leverage by relating debt to equity or to assets. It is used in solvency and capital-structure analysis to assess how reliant a business is on borrowed funds to support its operations and growth.
Different leverage ratios capture different aspects of risk. The most widely used are:
Other variants can compare net debt to EBITDA or adjust for off-balance-sheet items, depending on reporting conventions.
Lenders, rating agencies, and investors examine leverage ratios to gauge solvency, credit risk, and the balance between debt and equity in a company's capital structure. A rising ratio may reflect greater financial risk or expanded borrowing, while a declining ratio can indicate deleveraging or stronger equity. Comparisons are most meaningful among peers with similar business models and within the same industry, and trends over time matter more than a single point.
Different accounting treatments for debt and equity, industry norms, and business models can affect the comparability of leverage ratios. They should be analyzed alongside other measures of profitability, cash flow, and liquidity.
Company A has total debt of $200 million and shareholders' equity of $100 million, yielding a debt-to-equity ratio of 2.0.
Debt-to-Equity Ratio · Debt-to-Assets Ratio · Equity Multiplier · Capital Structure · Solvency · Financial Leverage · Interest Coverage Ratio