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Financial Leverage Ratio

Updated on March 8, 2023

Financial Leverage Ratio refers to certain ratios which measure a businesses’ ability to meet its long-term debt obligations. These ratios are also known as ‘Debt ratios’. Long-term here means one year or longer. The debt obligations can include interest payments, principal amount and other fixed liabilities.

Financial Leverage Ratio Explained

These ratios compare the overall debt burden of a company to its assets or equity. The resulting figures help in understanding whether the company’s assets belong to its shareholders or its creditors. The company is said to be less leveraged, if the shareholders own more assets. If creditors own a majority of assets, the company is said to be highly leveraged. These ratios help management and investors in understanding the capital structure of a company and the level of risk associated with it.

Key Financial Leverage Ratios

Key Financial Leverage Ratios are:
1. Debt Ratio
2. Debt To Equity Ratio
3. Equity Ratio