Leverage ratio is a financial term used to describe the way that a company invests its assets. Specifically, it describes the amount of equity a company has in relation to its debt. Knowing how to calculate leverage ratio is useful because it allows you to determine how fiscally responsible a company is. It also helps you make more informed decisions regarding personal investments in a company.
Step 1
Determine the amount of debt the company has. This is the total amount of money that the company owes to any outside sources. It can be found on the company balance sheet in the liabilities section.
Step 2
Determine the amount of equity the company has. This is the total value of the company's assets minus any company debt. It can be found on the company balance sheet in the assets section.
Step 3
Divide the company's debt by its equity. The result is the leverage ratio. For example, if the company had $1,000 worth of debt and $4,000 worth of equity you would divide 1,000 by 4,000 to get a leverage ratio of 1/4 or 0.25.