how to calculate financial leverage
there is an entire suite of leverage financial ratios used to calculate how much debt a company is leveraging in an attempt to maximize profits here are several common leverage ratios you can analyze a company s leverage by calculating its ratio of debt to assets this ratio indicates how much debt it uses to generate its assets if the debt ratio is high a company has relied on leverage to finance its assets a ratio of 1 0 means the company has 1 of debt for every 1 of assets if it is lower than 1 0 it has more assets than debt if it is higher than 1 0 it has more debt than assets debt ratio total debt total assets begin aligned textbf debt ratio mathbf textbf total debt mathbf div textbf total assets end aligned debt ratio total debt total assets keep in mind that when you calculate the ratio you re using all debt including short and long term debt vehicles instead of looking at what the company owns you can measure leverage by looking strictly at how assets have been financed the debt to equity d e ratio is used to compare what the company has borrowed to what it has raised from private investors or shareholders debt to equity d e ratio total debt total equity begin aligned textbf debt to equity d e ratio mathbf textbf total debt mathbf div textbf total equity end aligned debt to equity d e ratio total debt total equity a d e ratio greater than 1 0 means a company has more debt than equity however this doesn t necessarily mean a company is highly leveraged each company and industry typically operates in a specific way that may warrant a higher or lower ratio for example start up technology companies may struggle to secure financing and must often turn to private investors therefore a debt to equity ratio of 5 1 of debt for every 2 of equity may still be considered high for this industry you can also compare a company s debt to how much income it generates in a given period using its earnings before income tax depreciation and amortization ebitda the debt to ebitda ratio indicates how much income is available to pay down debt before these operating expenses are deducted from income a company with a high debt to ebitda carries a high degree of debt compared to what the company makes the higher the debt to ebitda the more leverage a company is carrying 