We use cookies to improve security, personalize the user experience,
enhance our marketing activities (including cooperating with our marketing partners) and for other
business use.
Click "here" to read our Cookie Policy.
By clicking "Accept" you agree to the use of cookies. Read less
Leverage Ratio: A Key Indicator of Financial Stability
Definition & Meaning
The leverage ratio is a financial metric that measures the degree to which a company is utilizing borrowed funds to finance its assets. It provides insight into a company's financial health by indicating how much of its assets are funded through debt compared to equity. A commonly used leverage ratio is the debt-to-equity ratio, which is calculated by dividing total liabilities by shareholder equity. This ratio helps investors and stakeholders assess the risk associated with the company's capital structure and its ability to meet financial obligations.
Table of content
Legal Use & context
The leverage ratio is primarily relevant in corporate finance and investment law. It is often used by financial analysts, investors, and legal professionals to evaluate a company's financial stability and risk profile. Understanding leverage ratios can be crucial in situations involving mergers and acquisitions, bankruptcy proceedings, and compliance with lending agreements. Users can manage related documents through legal templates available on platforms like US Legal Forms.
Key legal elements
Real-world examples
Here are a couple of examples of abatement:
Example 1: A technology company has total liabilities of $2 million and shareholder equity of $1 million. Its debt-to-equity ratio is calculated as 2:1, indicating that the company is heavily reliant on debt financing.
Example 2: A retail business with total liabilities of $500,000 and shareholder equity of $1.5 million has a debt-to-equity ratio of 0.33:1. This suggests a more conservative approach to leveraging debt (hypothetical example).
Comparison with related terms
Term
Definition
Key Difference
Debt-to-Equity Ratio
A specific type of leverage ratio that compares total liabilities to shareholder equity.
Focuses specifically on the relationship between debt and equity.
Debt Ratio
A ratio that measures the proportion of a company's assets that are financed by debt.
Calculates total debt relative to total assets, rather than equity.
Common misunderstandings
What to do if this term applies to you
If you are evaluating a company's financial health or considering an investment, calculate the leverage ratio to understand its risk profile. If you need assistance, consider using US Legal Forms' templates for financial documents. For complex situations, consulting a financial advisor or legal professional may be beneficial.
Find the legal form that fits your case
Browse our library of 85,000+ state-specific legal templates.