Leverage Ratios

Leverage Ratios are a valuable family of financial ratios that business owners should understand how to calculate and analyze when running their business.

What are Leverage ratios?

Leverage ratios are formulas that put two numbers from your business’ Balance Sheet and/or Income Statement in contrast with one another, in order to create a helpful financial ratio. 

This family of financial ratios looks at how the capital structure of your business is balanced between debt and assets. Certain leverage ratios also help assess a company’s ability to pay its loans.

Helpful Definitions:

Balance Sheet: A core financial statement that records a snapshot of a company’s assets, liabilities, and equity at the time of publication. For more information about the Balance Sheet, read our helpful blog post[1] !

Income Statement: Another core financial statement that reports a company’s revenue and expenses over a set period of time.

Which Leverage Ratios have individual videos?

To help you thoroughly understand Leverage Ratios, Know Your Numbers Accounting has created videos explaining each of the following:

Debt ratio – Measures the use of debt to finance a company

Equity ratio – Measures the use of equity to finance a company

Debt-to-equity ratio  Measures the use of debt and owner funds to finance a company

Interest coverage ratio  Measures a business’s ability to use debt effectively

What can Leverage Ratios tell me about my business?

Leverage Ratios are a useful tool when analyzing the capital structure of your business. All companies function on a financial foundation that is a mix between debt and equity/assets. Depending on the Leverage Ratio, the equation will provide you with a number that indicates how your mix of capital may affect your ability to meet your financial obligations and remain solvent.

Leverage ratios are also used by lenders to figure out whether or not to extend credit or loans to a business. Leverage Ratios such as the Interest Coverage Ratio and Debt to Equity Ratio are frequently used to determine a company’s level of risk. A company with a lower level of risk and greater solvency is much more likely to be approved for additional loans.

Debt Ratio

Good debt is a powerful tool, but bad debt can kill you. – Robert Kiyosaki What is the debt ratio? Measures the use of debt to finance a company. How is the debt ratio calculated? Debt ratio = total debt /...

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Equity Ratio

Sweat equity is the most valuable equity there is. Know your business and industry better than anyone else in the world. Love what you do or don’t do it. – Mark Cuban What is the equity ratio? Measures the use of...

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Debt To Equity Ratio

You really don’t need leverage in this world much. If you’re smart, you’re going to make a lot of money without borrowing. – Warren Buffett What is the debt-to-equity ratio? Measures the extent to which is debt used in relation to...

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Interest Coverage Ratio

“I’m not that much of a risk taker. I just take situations that people perceive to be high risk, and I decide that they can be managed to low risk.” – Andrew Beal What is the interest coverage ratio? Measures...

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