What is a 'Leverage Ratio'
Companies rely on a mixture of owners' equity and debt to finance their operations. A leverage ratio is any one of several financial measurements that look at how much capital comes in the form of debt (loans), or assesses the ability of a company to meet financial obligations.
BREAKING DOWN 'Leverage Ratio'
Too much debt can be dangerous for a company and its investors. Uncontrolled debt levels can lead to credit downgrades or worse. On the other hand, too few debts can also raise questions. If a company's operations can generate a higher rate of return than the interest rate on its loans, then the debt is helping to fuel growth in profits. A reluctance or inability to borrow may be a sign that operating margins are simply too tight.
There are several different specific ratios that may be categorized as a leverage ratio, but the main factors considered are include debt, equity, assets and interest expenses.
A leverage ratio may also refer to one used to measure a company's mix of operating costs, giving an idea of how changes in output will affect operating income. Fixed and variable costs are the two types of operating costs; depending on the company and the industry, the mix will differ.
Finally, the consumer leverage ratio refers to the level of consumer debt as compared to disposable income and is used in economic analysis and by policymakers
Leverage Ratios for Evaluating Solvency and Capital Structure
The most well known financial leverage ratio is the debttoequity ratio. It is expressed as:
Total debt / Total Equity
For example, if a company has $10M in debt and $20M in equity, it has a debttoequity ratio of 0.50 = ($10M/$20M). A high debt/equity ratio generally indicates that a company has been aggressive in financing its growth with debt. This can result in volatile earnings as a result of the additional interest expense, and if it is very high, it may increase the chances of a default or bankruptcy. Typically a debt to equity ratio greater than 2.0 indicates a risky scenario for the investor, however this yardstick can vary by industry. Businesses that require large capital expenditures (CapEx) may need to secure more loans than other companies. It's a good idea to measure a firm's leverage ratios against past performance and its competitors' performance to better understand the data.
The financial leverage ratio is similar, but replaces debt with assets in the numerator:
Avg. Total Assets/ Avg. Total Equity
The financial leverage ratio is sometimes referred to as the equity multiplier. For example, a company has assets valued at $2 billion and stockholder equity of $1 billion. The equity multiplier value would be 2.0 ($2 billion / $1 billion), meaning that one half of a company’s assets are financed by equity. The balance must be financed by debt.
The financial leverage ratio is a component of the decomposed DuPont analysis for calculating return on equity (ROE):
ROE = Net Profit Margin x Asset Turnover x Financial Leverage Ratio
An indicator that measures the total amount of debt in a company’s capital structure is the debttocapitalization ratio, which measures a company’s financial leverage. It is calculated as:
Longterm Debt to Capitalization Ratio = Longterm Debt / (LongTerm Debt + minority interest + equity)
In this ratio, operating leases are capitalized and equity includes both common and preferred shares.
Total Debt to Capitalization Ratio = (current liabilities + LongTerm Debt) / (current liabilities + LongTerm Debt + minority interest + equity)
Degree of Financial Leverage
Degree of financial leverage (DFL) is a ratio that measures the sensitivity of a company’s earnings per share (EPS) to fluctuations in its operating income, as a result of changes in its capital structure. It measures the percentage change in EPS for a unit change in earnings before interest and taxes (EBIT), and is represented as:
DFL can also be represented by the equation below:
This ratio indicates that the higher the degree of financial leverage, the more volatile earnings will be. Since interest is usually a fixed expense, leverage magnifies returns and EPS. This is good when operating income is rising, but it can be a problem when operating income is under pressure.
Consumer Leverage Ratio
The consumer leverage ratio is used to quantify the amount of debt the average American consumer has, relative to their disposable income.
Some economists have stated that the rapid increase in consumer debt levels has been a main factor for corporate earnings growth over the past few decades. Others have blamed the high level of consumer debt as a major cause of the great recession.
Consumer Leverage Ratio = Total household debt/ Disposable personal income

LongTerm Debt To Capitalization ...
A ratio showing the financial leverage of a firm, calculated ... 
Capitalization Ratios
Indicators that measure the proportion of debt in a company’s ... 
Debt Ratio
A financial ratio that measures the extent of a company’s or ... 
DebtToCapital Ratio
A measurement of a company's financial leverage, calculated as ... 
Leverage
1. The use of various financial instruments or borrowed capital, ... 
Long Term Debt To Total Assets ...
A measurement representing the percentage of a corporation's ...

Investing Basics
Understanding Leverage Ratios
Large amounts of debt can cause businesses to become less competitive and, in some cases, lead to default. To lower their risk, investors use a variety of leverage ratios  including the debt, ... 
Investing Basics
4 Leverage Ratios Used In Evaluating Energy Firms
Analysts use specific leverage ratios to compare firms within an industry. A basic understanding of these ratios helps when evaluating oil and gas stocks. 
Forex
The Debt To Equity Ratio
The debt to equity ratio identifies companies that are highly leveraged and therefore a higher risk for investors. Find out how this ratio is calculated and how you can use it to evaluate a stock. 
Fundamental Analysis
4 Leverage Ratios Used In Evaluating Energy Firms
These four leverage ratios can help investors understand how oil and gas firms are managing their debt. 
Investing
Debt Ratio
The debt ratio divides a company’s total debt by its total assets to tell us how highly leveraged a company is—in other words, how much of its assets are financed by debt. The debt component ... 
Investing Basics
The Optimal Use Of Financial Leverage In A Corporate Capital Structure
The amount of debt and equity that makes up a company's capital structure has many risk and return implications. 
Investing
Total Debt to Total Assets
Total Debt to total assets, also called the debt ratio, is an accounting measurement that shows how much of a company’s assets are funded by borrowing. In business, borrowing is also called leverage. 
Economics
Calculating LongTerm Debt to Total Assets Ratio
A company’s longterm debt to total assets ratio shows the percentage of its assets that are financed with longterm debt. 
Bonds & Fixed Income
Evaluating A Company's Capital Structure
Learn to use the composition of debt and equity to evaluate balance sheet strength. 
Active Trading Fundamentals
Analyzing AT&T's Debt Ratios in 2016 (T)
Learn about AT&T Inc. and its key debt ratios, such as the debttoequity ratio, interest coverage ratio and cash flowtodebt ratio.

What are financial risk ratios and how are they used to measure risk?
Explore some of the primary financial risk ratios that investors and analysts commonly use to evaluate a company's overall ... Read Answer >> 
How can I use the debttocapital ratio to evaluate a stock?
Understand the significance of the debt to capital ratio of financial leverage, and learn how investors and analysts make ... Read Answer >> 
If a company has a high debt to capital ratio, what else should I look at before ...
Learn about some of the financial leverage and profitability ratios that investors can analyze to supplement examining the ... Read Answer >> 
Besides operating leverage, what are other important forms of leverage for businesses?
Learn about what other forms of leverage exist for businesses besides operational leverage, and the primary leverage metrics ... Read Answer >> 
What is the most widely used gearing ratio?
Understand the most commonly used gearing, or leverage, ratio used to evaluate a company's financial condition, the debt ... Read Answer >> 
What are the most common leverage ratios for evaluating a company?
Learn more about some of the most common leverage ratios used by traders to determine whether a company is using debt in ... Read Answer >>