In risk analysis, a way to determine a company's
leverage. The ratio is calculated by taking the company's
long-term debt and dividing it by the total value of its preferred and common
stock. Put graphically:
Ratio = Long-term debt / (
Preferred stock +
Common stock)
The greater a company's leverage, the higher the ratio. Generally, companies with higher ratios are thought to be more
risky because they have more liabilities and less
equity.