In this tutorial, we will comprehensively learn all about the Leverage Ratio, also known as the Debt to Equity Ratio. The meaning, formula, examples, calculations, and interpretation of the Leverage Ratio are all covered in this tutorial. Using the Colgate Case Study, we will also learn how to calculate Leverage Ratio in Excel.
You can download the Colgate Leverage Ratio template from this link - [ Ссылка ]
What is Leverage Ratio?
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The leverage ratio, commonly known as the debt to equity ratio, determines how much debt a company has compared to its equity. This is an important ratio for bankers since it indicates the company's ability to repay loans with its own funds.
Formula
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Leverage Ratio (Debt to Equity) Formula = Total Debt (current + long-term) / Shareholders’ Equity
Interpretation
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- A lower ratio is generally thought to be desirable because it implies that the company's assets cover its liabilities with its own capital.
- An increasing leverage ratio over time indicates that the company is unable to generate enough cash flow from its core business and is relying on external debt to stay afloat.
- Capital-intensive sectors have a higher leverage ratio in contrast to the service sector.
For more details, you can refer to our article - [ Ссылка ]
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