Leverage Ratio:Debt/Leverage/Gearing Ratio
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:
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FORMULA |
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Total Liabilities / Total Assets |
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MEASURE WHAT |
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Measures the proportion of total assets financed by debt. |
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SCORE OR VALUE |
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Lower Ratio is the safer. A low ratio may indicate potential to finance new assets with debt |
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SALIENT POINTS TO NOTE: |
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1. Total liabilities= short term + long term debt= |
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2. A low ratio may indicate potential to finance new assets with debt |
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