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LEVERAGE RATIO

Introduction

Any ratio used to calculate the financial leverage of a company to get an idea of the company's methods of financing or to measure its ability to meet financial obligations. There are several different ratios, but the main factors looked at include debt, equity, assets and interest expenses.

The higher a company's degree of leverage, the more the company is considered risky. As for most ratios, an acceptable level is determined by its comparison to ratios of companies in the same industry.A company with high gearing (high leverage) is more vulnerable to downturns in the business cycle because the company must continue to service its debt regardless of how bad sales are. A greater proportion of equity provides a cushion and is seen as a measure of financial strength.

Liberage Ratio

Ratio	Calculation	Discussion
Debt to Equity	Total Liabilities / Total Stockholders’ Equity	Direct comparison of debt to equity stakeholders and the most common measure of capital structure.
Debt Ratio	Total Liabilities / Total Assets	A broader definition, stating debt as a percent of assets.
Interest Coverage (Times Interest Earned)	(Net Income + Interest Expense + Tax Expense) / Interest Expense	This is a direct measure of the firm’s ability to meet interest payments, indicating the protection provided from current operations.
Long-term Debt to Equity	Long-term Liabilities / Total Stockholders’ Equity	A long-term perspective of debt and equity positions of stakeholders
Debt to Market Equity	Total Liabilities at Book Value / Total Equity at Market Value	Market valuation may represent a better measure of equity than book value. Most firms have a market premium relative to book value.
Bonded Debt to Equity	Bonded Debt / Stockholders’ Equity
Debt to Tangible Net Worth	Total Liabilities / (Common Equity – Intangible Assets)