Leverage Ratio

Gearing or leverage ratio measure the debt-equity relation in a company’s capital structure or the extent to which the company has made use of financial leverage.

A highly geared company is one which has a large amount of creditor fund in relation to its equity. A low geared company has a large equity and few borrowings. The ratio normally used for measuring leverage is the debt-to-equity ratio and the debt-coverage-ratio.


Debt to Equity Ratio

The debt to equity ratio (D/E) measures the relative proportion of creditor fund to shareholders’ equity fund. It reflects the company’s dependence on debt sources of financing and therefore the financial riskiness of the company for both bondholders and shareholders.

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Debt Coverage Ratio

The debt coverage ratio measures the extent to which a firm has financed its assets with non-owner sources of fund. The example calculation for debt-coverage ratio is:

In other words, the company’s assets are financed with an equal proportion of creditor fund to equity fund.

More about debt explained in D/E

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Related Financial Ratio

Return on Equity (ROE), Debt to Equity Ratio (D/E),
Earnings Per Share Growth Rate (EPSGR), Profit Margin,
Earnings Per Share (EPS), Price to Earnings Ratio (PER)

Efficiency Ratio, Liquidity Ratio, Profitability Ratio,

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