Leverage Ratio
Any of a family of ratios measuring how much debt a company uses relative to its equity, assets, or earnings.
Leverage ratios measure dependence on borrowed money. The main variants are debt-to-equity (claims of creditors versus owners), debt-to-assets (what fraction of the asset base is financed by liabilities), and debt-to-EBITDA (how many years of operating earnings it would take to retire the debt). Each answers a slightly different question, and a full credit review usually computes at least two: a balance-sheet measure for cushion and an earnings measure for serviceability.
Leverage amplifies everything. In good years, debt magnifies returns on the owners' small equity slice; in bad years, fixed debt service turns a revenue dip into a covenant breach. For trade creditors the practical questions are: how much loss can this company absorb before equity is gone, and who stands ahead of me? A highly leveraged customer whose bank holds a blanket lien on receivables and inventory leaves an unsecured supplier with claims on very little.
Judge leverage against industry norms and asset quality together. Debt-to-EBITDA below 3x is conservative in most industries, 3-4x moderate, above 5x aggressive. But 4x leverage against durable, resalable assets is safer than 3x against specialized equipment and goodwill. And always check the maturity wall: leverage that must be refinanced in the next twelve months carries refinancing risk that the ratio itself does not show.
Formula
Common forms: Debt-to-Equity = Total Liabilities / Equity; Debt-to-Assets = Total Liabilities / Total Assets; Debt-to-EBITDA = Total Debt / EBITDA
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