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Leverage ratio

The leverage ratio is total liabilities divided by total assets or equity and shows what share of assets is financed by debt. The leverage (indebtedness) ratio measures a company’s financial risk.
Contents
  1. 1.Key points
  2. 2.Formula / calculation
  3. 3.Interpretation
  4. 4.Pitfalls
  5. 5.Frequently asked questions

Key points

  • Debt boosts return on equity in good times but burdens the company with interest and refinancing risk in bad times.
  • Leverage below 50% is considered conservative, above 70% high risk; banks operate with very high leverage by nature.
  • trade payables (suppliers) and financial debt carry different risks and should be separated.

Formula / calculation

Leverage ratio = Total liabilities / Total assets × 100; Debt-to-equity = Total liabilities / Equity. Financial leverage counts only interest-bearing debt: Net financial debt / Equity.

Interpretation

For investors it is the first indicator of bankruptcy risk.

Leverage below 50% is considered conservative, above 70% high risk; banks operate with very high leverage by nature. In high-rate periods low-leverage companies have an advantage.

Pitfalls

trade payables (suppliers) and financial debt carry different risks and should be separated. FX debt adds currency risk. Lease liabilities (IFRS 16) raise leverage. Read with net debt/EBITDA.

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Frequently asked questions

The leverage ratio is total liabilities divided by total assets or equity and shows what share of assets is financed by debt.

Leverage ratio = Total liabilities / Total assets × 100; Debt-to-equity = Total liabilities / Equity. Financial leverage counts only interest-bearing debt: Net financial debt / Equity.

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