Leverage Ratio: Meaning, Types, Formula, and Importance

A leverage ratio measures how much debt a business uses to finance its operations compared to its equity or assets. It helps determine a company’s financial stability and long-term risk. Common types of leverage ratios include the Debt-to-Equity Ratio, Debt-to-Asset Ratio, and Interest Coverage Ratio. These ratios assess whether a company can comfortably repay its obligations. The basic formula varies by type, such as Debt-to-Equity = Total Debt / Total Equity. Understanding leverage ratios is important for investors, lenders, and business owners to evaluate financial health, borrowing capacity, and risk exposure before making decisions.