Financial leverage ratios, sometimes called equity or debt ratios, measure the value of equity in a company by analyzing its overall debt picture. These ratios either compare debt or equity to assets as well as shares outstanding to measure the true value of the equity in a business.
In other words, the financial leverage ratios measure the overall debt load of a company and compare it with the assets or equity. This shows how much of the company assets belong to the shareholders rather than creditors. When shareholders own a majority of the assets, the company is said to be less leveraged. When creditors own a majority of the assets, the company is considered highly leveraged. All of these measurements are important for investors to understand how risky the capital structure of a company and if it is worth investing in.
Here are the most common financial leverage ratios.
