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Leverage ratio defines the level of debt in a company to finance its operations.
A leverage ratio is a financial metric that measures the extent to how much a company is using borrowed money (debt) compared to its own funds (equity) or assets.
It helps to evaluate financial risk and how effectively a company is using debt to grow its business.
Example
Suppose a company has the total assets of ₹10,00,000, total debt of Rs 6,00,000, and shareholder's equity is Rs 4,00,000.
Debt to equity ratio
= Debt /Total equity = Rs 6,00,000/Rs 4,00,000 = 1.5
Debt ratio = 6,00,000/10,00,000 = 0.60 means 60% of company's assets are financed by debt.
A high leverage ratio (like high debt to equity ratio) means that the company is highly dependent on debt which increases financial risk whereas a low leverage ratio means that company is more replying on equity.
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