Leverage Ratio:Debt/Leverage/Gearing Ratio

June 8th, 2006 Comments off
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We now look at the financial ratio for assessing the LEVERAGE or gearing of a company.

Essentially, the Leverage Financial ratio should be able to measure the amounts of  borrowed money being used by the firm.

Leverage Ratios are classified as either:-

  • Capitalization Ratios, focusing on how investments are financed; or
  • Coverage Ratios, focusing on the ability to service the firm sources of financing.

DEBT / LEVERAGE / GEARING RATIO:

FORMULA

Total Liabilities / Total Assets

MEASURE  WHAT

Measures the proportion of total assets financed by debt.

SCORE OR VALUE

Lower Ratio is the safer.

A low ratio may indicate potential to finance new assets with debt

SALIENT POINTS TO NOTE:

1. Total liabilities= short term + long term debt=

2. A low ratio may indicate potential to finance new assets with debt

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Financial Accounting

 
 

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