which of the following is considered a leverage ratio? course hero

What are the most common leverage ratios?

Below are 5 of the most commonly used leverage ratios: 1 Debt-to-Assets Ratio = Total Debt / Total Assets 2 Debt-to-Equity Ratio = Total Debt / Total Equity 3 Debt-to-Capital Ratio = Today Debt / (Total Debt + Total Equity) More items...

What are the advantages and disadvantages of high leverage?

Leverage ratios represent the extent to which a business is utilizing borrowed money. It also evaluates company solvency and capital structure. Having high leverage in a firm’s capital structure can be risky, but it also provides benefits. The use of leverage is beneficial during times when the firm is earning profits, as they become amplified.

What is the ratio of debt to equity for this firm?

When comparing debt to equity, the ratio for this firm is 0.82, meaning equity makes up a majority of the firm’s assets. Leverage ratios represent the extent to which a business is utilizing borrowed money.

Does leverage multiply risk or just earnings?

If leverage can multiply earnings, it can also multiply risk. Having both high operating and financial leverage ratios can be very risky for a business. A high operating leverage ratio illustrates that a company is generating few sales, yet has high costs or margins that need to be paid off.

What does higher leverage ratio mean?

A higher ratio indicates a greater ability to meet obligations. in conjunction with the leverage ratios to measure a company’s ability to pay its financial obligations. Debt Capacity Debt capacity refers to the total amount of debt a business can incur and repay according to the terms of the debt agreement. .

What is leverage ratio?

A leverage ratio is any kind of financial ratio. Financial Analysis Ratios Glossary Glossary of terms and definitions for common financial analysis ratios terms. It's important to have an understanding of these important terms. that indicates the level of debt incurred by a business entity against several other accounts in its balance sheet.

What is combined leverage ratio?

A combined leverage ratio refers to the combination of using operating leverage and financial leverage. For example, when viewing the balance sheet and income statement, operating leverage influences the upper half of the income statement through operating income while the lower half consists of financial leverage, wherein earnings per share to the stockholders can be assessed.

What is operating leverage?

An operating leverage ratio refers to the percentage or ratio of fixed costs to variable costs. A company that has high operating leverage bears a large proportion of fixed costs in its operations and is a capital intensive firm. Small changes in sales volume would result in a large change in earnings and return on investment. A negative scenario for this type of company could be when its high fixed costs are not covered by earnings because the market demand for the product decreases. An example of a capital-intensive business is an automobile manufacturing company.

What are some accounts that are considered to have significant comparability to debt?

Some accounts that are considered to have significant comparability to debt are total assets, total equity, operating expenses, and incomes.

What is debt service coverage ratio?

Debt service coverage ratio: The ability of a company to pay all debt obligations, including repayment of principal and interest. Cash coverage ratio: The ability of a company to pay interest expense with its cash balance. Asset coverage ratio: The ability of a company to repay its debt obligations with its assets.

Why is leverage important?

It also evaluates company solvency and capital structure. Having high leverage in a firm’s capital structure can be risky, but it also provides benefits. The use of leverage is beneficial during times when the firm is earning profits, as they become amplified.