Leverage Ratios

Leverage ratios

Measures of the relative value of stockholders, capitalization, and creditors obligations, and of the firm's ability to pay financing charges. Value of firm's debt to the total value of the firm (debt plus stockholder capitalization).

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Leverage Ratio

In risk analysis, any ratio that measures a company's leverage. One example of a gearing ratio is the long-term debt/capitalization ratio, which is calculated by taking the company's long-term debt and dividing it by its long-term debt added to its preferred and common stock. Another example is a simple debt-to-equity ratio, which is calculated by dividing total debt by total equity. Generally, companies with higher leverage as determined by a leverage ratio are thought to be more risky because they have more liabilities and less equity. A leverage ratio is also called a gearing ratio or an equity multiplier.