What is a lever ratio?

The ratio of lever effect is a comparison of the combination of debt, equity, the company's assets and the interest of the company to detect its long -term solvency and the ability to fulfill its financial obligations. The lever effect or toothed sheets concerns the use of loans or other forms of debt to finance acquisitions or investments. The aim of using these financing options is to get a higher payback rate than the interest rate on the loan and to intensify profits. Companies with a high degree of lever effect are considered to be risky and highly vulnerable to the economic decline, as they must continue to fulfill their debt obligations despite poor production or sale.

The three most commonly used patterns of the lever effect ratio are the debt ratio to the capital, the debt ratio, and the ratio of interest coverage. The acceptable leverage ratios are determined by comparing the ratios of other entities in the same industry. They are also determined by monitoring the same ratio for one company over time.

Debt ratio to capital is most often PThe lever ratio, which provides the rate of obligations of the Company in relation to the funds provided by the shareholder. Most of the capitalization of shareholders provides a security network and is considered a sign of financial strength. This ratio is calculated by distributing total debts by the total equity of shareholders. The lower the number, the less the gear or the lever effect that the company uses. Since the ratio of the lever effect is used to assess long -term solvency, many companies deduct accounts due, short -term debt, out of the total debt before completing the calculation of the ratio.

Another type of lever ratio, debt ratio, or debt ratio to debt, indicates what part of the Company's assets is financed by debt. The debt ratio is determined by the distribution of the company's total debt by total assets. A higher debt ratio means a higher step -off effect used by the company. Operating obligations are often deducted from the total debts before the ratio of the ratio.

alternatively ratio afterInterest coverage indicates the relative ease with which the company can pay the interest associated with its debt. The formula divides the amount obtained into the interest cost of interest and interest and taxes is deducted from earnings. In general, the ratio of interest in coverage less than two is the red flag that the company may not be able to fulfill its interest duties. This ratio is monitored as a critical indicator of the viability of society, since even a deeply indebted society can be able to make its interest payments. Once this ratio has dropped, the default or bankruptcy may be immediate.