Definition of 'Leverage Ratio' 1.

Any ratio used to calculate the financial leverage of a company to get a n idea of the company's methods of financing or to measure its ability to meet f inancial obligations. There are several different ratios, but the main factors l ooked at include debt, equity, assets and interest expenses. 2. A ratio used to measure a company's mix of operating costs, giving an i dea of how changes in output will affect operating income. Fixed and variable co sts are the two types of operating costs; depending on the company and the indus try, the mix will differ Investopedia explains 'Leverage Ratio' 1. the most well-known financial leverage ratio is the debt-to-equity ratio. For example, if a company has $10M in debt and $20M in equity, it has a debt-to-equ ity ratio of 0.5 ($10M/$20M). 2. Companies with high fixed costs, after reaching the breakeven point, see a gr eater increase in operating revenue when output is increased compared to compani es with high variable costs. The reason for this is that the costs have already been incurred, so every sale after the breakeven transfers to the operating inco me. On the other hand, a high variable cost company sees little increase in oper ating income with additional output, because costs continue to be imputed into t he outputs. The degree of operating leverage is the ratio used to calculate this mix and its effects on operating income. Debt ratio: Debt Ratio is a financial ratio that indicates the percentage of a company's ass ets that are provided via debt. It is the ratio of total debt (the sum of curren t liabilities and long-term liabilities) and total assets (the sum of current as sets, fixed assets, and other assets such as 'goodwill'). OR alternatively For example, a company with $2 million in total assets and $500,000 in total lia bilities would have a debt ratio of 25%. The higher the ratio, the greater risk will be associated with the firm's operat ion. In addition, high debt to assets ratio may indicate low borrowing capacity of a firm, which in turn will lower the firm's financial flexibility. Like all f inancial ratios, a company's debt ratio should be compared with their industry a verage or other competing firms. Total liabilities divided by total assets. The debt/asset ratio shows the propor tion of a company's assets which are financed through debt. If the ratio is less than 0.5, most of the company's assets are financed through equity. If the rati o is greater than 0.5, most of the company's assets are financed through debt. C ompanies with high debt/asset ratios are said to be "highly leveraged," not high ly liquid as stated above. A company with a high debt ratio (highly leveraged) c ould be in danger if creditors start to demand repayment of debt.

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