1. What is the Leverage Ratio?

The leverage ratio measures the degree to which a company or investor uses borrowed money. It compares the total assets to the equity, showing how much debt is being used to finance assets.

2. How Does the Calculator Work?

The calculator uses the leverage ratio formula:

Where:

• \( \text{Assets} \) — Total value of all assets (USD)
• \( \text{Equity} \) — Total owner's equity (USD)

Explanation: A higher ratio indicates more debt relative to equity, which means higher financial risk but also potential for higher returns.

3. Importance of Leverage Ratio

Details: The leverage ratio is crucial for assessing financial risk, determining creditworthiness, and making investment decisions. It helps investors and creditors understand how a company is financing its operations.

4. Using the Calculator

Tips: Enter total assets and equity in USD. Both values must be positive numbers. The calculator will compute the leverage ratio.

5. Frequently Asked Questions (FAQ)

Q1: What is a good leverage ratio?
A: It varies by industry, but generally a ratio below 2 is considered conservative, while above 5 is considered aggressive.

Q2: How is leverage ratio different from debt-to-equity?
A: While similar, debt-to-equity ratio uses total liabilities in the numerator, while leverage ratio uses total assets.

Q3: What does a leverage ratio of 1 mean?
A: A ratio of 1 means assets equal equity, indicating no debt financing.

Q4: Why do companies use leverage?
A: Companies use leverage to amplify potential returns, take advantage of tax benefits, and finance growth without diluting ownership.

Q5: What are the risks of high leverage?
A: High leverage increases financial risk, interest expenses, and vulnerability to economic downturns or rising interest rates.