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Leverage Ratio

Last updated 23rd Sep 2022


The term leverage ratio is used to describe several measures of a company's financial leverage. Also known as gearing, leverage measures the amount of debt a company has issued relative to other capital such as equity.


The three most common leverage ratios include the debt ratio, debt-to-equity, and interest coverage.

Debt Ratio = Total Liabilities / Total Assets

Debt to Equity = Total Liabilities / Owner's Equity

Interest Coverage = Operating Income / Interest Expense


Leverage is often used interchangeably with the term debt. Creditors consist of bondholders and other financial institutions that have loaned money to a company. In exchange for the use of their money, companies pay creditors a rate of interest on the outstanding principal.

If a company cannot make payments to creditors, they have the first claim to the assets of the company. If a company does not generate enough profits to pay money owed to creditors, they can force the company to sell its assets to help repay this money as part of a bankruptcy proceeding.

Leverage ratios are used by investors, analysts and creditors to measure this risk of non-payment. When drawing conclusions about the relative performance of a company, benchmark comparisons should be made with competitors in the same industry.


Company A's balance sheet indicates total liabilities of $16,196,000, stockholders equity of $15,420,000, and total assets of $31,616,000. The two leverage ratios derived from this information include:

Debt Ratio

= $16,196,000 / $31,616,000, or 0.51

Debt to Equity

= $16,196,000 / $15,420,000, or 1.05

Related Terms

leverage, debt ratio, return on equity, return on investment

Moneyzine Editor

Moneyzine Editor