Financial Statement Analysis

- Ratio Analysis of Financial Statements (Formula, Types, Excel)
- Ratio Analysis Advantages
- Ratio Analysis
- Liquidity Ratios
- Cash Ratio
- Cash Ratio Formula
- Quick Ratio
- Quick Ratio Formula
- Current Ratio
- Current Ratio Formula
- Acid Test Ratio Formula
- Defensive Interval Ratio
- Working Capital Ratio
- Working Capital Formula
- Net Working Capital Formula
- Changes in Net Working Capital
- Cash Flow from Operations Ratio
- Cash Reserve Ratio
- Operating Cycle Formula
- Current Ratio vs Quick Ratio
- Bid Ask Spread
- Liquidity vs Solvency
- Liquidity
- Solvency
- Solvency Ratios
- Equity Ratio
- Capital Adequacy Ratio
- Liquidity Risk
- Altman Z Score

- Turnover Ratios
- Inventory Turnover Ratio
- Accounts Receivable Turnover
- Accounts Receivables Turnover Ratio
- Accounts Payable Turnover Ratio
- Days Inventory Outstanding
- Days in Inventory
- Days Sales Outstanding
- Average Collection Period
- Days Payable Outstanding
- Cash Conversion Cycle
- Cash Conversion Cycle (CCC) Formula
- Fixed Asset Turnover Ratio Formula
- Debtor Days Formula
- Working Capital Turnover Ratio

- Profitability Ratios
- Profitability Ratios Formula
- Common Size Income Statement
- Vertical Analysis of Income Statement
- Profit Margin
- Gross Profit Margin Formula
- Gross Profit Percentage
- Operating Profit Margin Formula
- EBIT Margin Formula
- Operating Income Formula
- Net Profit Margin Formula
- EBIDTA Margin
- Degree of Operating Leverage Formula (DOL)
- NOPAT Formula
- OIBDA
- Earnings Per Share
- Basic EPS
- Diluted EPS
- Basic EPS vs Diluted EPS
- Return on Equity (ROE)
- Return on Capital Employed (ROCE)
- Return on Invested Capital (ROIC)
- Return on Sales
- ROIC Formula (Return on Invested Capital)
- Return on Investment Formula (ROI)
- ROIC vs ROCE
- ROE vs ROA
- CFROI
- Cash on Cash Return
- Return on Total Assets (ROA)
- Return on Average Capital Employed
- Capital employed Employed
- Return on Average Assets (ROAA)
- Return on Average Equity (ROAE)
- Return on Assets Formula
- Return on Equity Formula
- DuPont Formula
- Net Interest Margin Formula
- Earnings Per Share Formula
- Diluted EPS Formula
- Contribution Margin Formula
- Unit Contribution Margin
- Revenue Per Employee Ratio
- Operating Leverage
- EBIT vs EBITDA
- EBITDAR
- Capital Gains Yield
- Tax Equivalent Yield
- LTM Revenue
- Operating Expense Ratio Formula
- Overhead Ratio Formula
- Variable Costing Formula
- Capitalization Rate
- Cap Rate Formula
- Comparative Income Statement
- Capacity Utilization Rate Formula
- Total Expense Ratio Formula

- Efficiency Ratios
- Dividend Ratios
- Debt Ratios
- Debt to Equity Ratio
- Debt Coverage Ratio
- Debt Ratio
- Debt to Asset Ratio Formula
- Coverage Ratio
- Coverage Ratio Formula
- Debt to Income Ratio Formula (DTI)
- Capital Gearing Ratio
- Capitalization Ratio
- Interest Coverage Ratio
- Times Interest Earned Ratio
- Debt Service Coverage Ratio (DSCR)
- DSCR Formula (Debt service coverage ratio)
- Financial Leverage Ratio
- Financial Leverage Formula
- Degree of Financial Leverage Formula
- Net Debt Formula
- Leverage Ratios
- Leverage Ratios Formula
- Operating Leverage vs Financial Leverage
- Current Yield
- Debt Yield Ratio
- Solvency Ratio Formula

**Leverage Ratio Formula (Table of Contents)**

## What is Leverage Ratios Formula?

The formula for leverage ratios is basically used to measure the debt level of a business relative to the size of the balance sheet. The calculation leverage ratios is primarily by comparing the total debt obligation relative to either the total assets or the equity contribution of business. A high leverage ratio indicates that the business may have taken too many loans and is in too much debt compared to the ability of the business to reasonably service the debt with the future cash flows. The two key leverage ratios are:

### Explanation of the Leverage Ratios Formula (Debt Ratio & Debt to Equity Ratio)

#### Debt Ratio:

The ratio is basically a comparison of assets to debt and is calculated by dividing the total debt by the total assets. A high ratio means that a huge portion of the asset purchases is debt funded.

Debt Ratio Formula can be represented as,

**Debt Ratio=Total Debt / Total Assets**

#### Debt to Equity Ratio:

The ratio is basically a comparison of equity to debt and is calculated by dividing the total debt by the total equity. A high ratio means that the promoters of the business are not infusing the adequate amount of equity to fund the business resulting in a higher amount of debt.

Debt to equity ratio can be represented as,

**Debt to equity ratio =Total Debt / Total Equity**

### Steps to Calculate Debt Ratio and Debt to Equity Ratio

#### Debt Ratio:

The formula for debt ratio can be calculated by using the following steps:

**Step #1:** Firstly, the total debt (includes a short term as well as long term funding) and the total assets is collected which is easily available from the balance sheet.

**Step #2: **Finally, the debt ratio is calculated by dividing the total debt by the total assets.

#### Debt to Equity Ratio:

The formula for debt to equity ratio can be calculated by using the following steps:

**Step #1:** Here, the total debt and the total equity both are collected from the liability side of the balance sheet.

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**Step #2: **Finally, the debt to equity ratio is calculated by dividing the total debt by the total equity.

**Examples of Leverage Ratios Formula (with Excel Template)**

Let us see some simple to advanced examples of Leverages Ratios formulas to understand it better

#### Example #1

**Let us assume a company with the following financial for the current year. Use the calculation of Leverage Ratios for the same.**

From the above table, the following can be calculated,

#### #1 – Total Debt

**Total debt = Long term bank loan + Short term bank loan**

**So the Total debt will be = $36,000**

#### #2 – Debt Ratio

**Debt ratio = Total debt / Total assets**

So, the calculation of the Debt ratio will be as follows –

**Debt Ratio will be –**

**Debt ratio = 0.48**

#### #3 – Debt to Equity Ratio

**Debt to equity ratio = Total debt / Total equity**

So, the calculation of Debt to equity ratio will be as follows –

**Debt to Equity Ratio will be-**

**Debt to equity ratio = 0.92x**

#### Example #2

**Let us take an example of a real company Apple Inc. with the following financial for the year ended on September 29, 2018 (all amounts in USD millions)**

From the above table, the following can be calculated,

#### #1 – Total Debt

Total debt = Long term bank loan + Short term loan

**Total debt = $114,483**

**Total Assets will be:**

#### #2 – Total Equity

Total equity = Paid-in equity capital + Retained earnings + Comprehensive income / (loss)

So from the above calculation Total Equity will be:

#### #3 – Debt Ratio

Therefore, Debt ratio = Total debt / Total assets

Calculation of Debt Ratio will be –

So from the above calculation Debt Ratio will be:

#### #4 – Debt to Equity Ratio

And, Debt to equity ratio = Total debt / Total equity

Calculation of Debt to Equity Ratio will be –

- Debt to equity ratio = $114,483 / $107,147

**Calculation of Debt to Equity Ratio-**

So, from the above calculation Debt to equity ratio will be:

### Relevance and Use of Leverage Ratios Formula

The concept of leverage ratios formulas is very essential from a lender’s vantage point as it is a measure of risk to check if a borrower can pay back its debt obligations. However, a reasonable amount of leverage can be seen as advantageous to the shareholders since it indicates that the business is optimizing its use of equity to fund operations which eventually increases the return on equity for the existing shareholders.

The assessment of the leverage ratios equation form is an important part of a prospective lender’s analysis of whether to lend to the business. However, the leverage ratios formula per se does not offer sufficient information for a lending decision since it is a relative indicator and has to be seen in conjunction with the absolute figures. The lender is required to review both the income statement and cash flows statement to check if the business is generating adequate cash flows to pay back the debt. The lender is also required to review the projected cash flows to check if the business can continue to support debt payments in the future. As such the leverage ratios formula are used as a part of the analysis to determine whether it is safe to lend money to the business given its debt servicing ability.

### Recommended Articles

This has been a guide to Leverage Ratios Formula. Here we discuss how to calculate Leverage Ratios formula using practical examples and downloadable excel template. You can learn more about financial analysis from the following articles –

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