Leverage Ratio
Leverage Ratio Calculator will provide an overview of the company’s earnings, equity, and assets in relation to its debt. These ratios are used by investors, BOD, creditors, and other stakeholders of the company to measure the financial strength of the company. These are the financial indices that help analyze the capital structure, financial obligation, and its ability to clear these obligations. The leverage ratio calculator will make it easy for the companies to calculate the same.
The formula for Calculating Leverage Ratios
The formula for calculating different leverage ratios is:
Debt to EBITDA
Total Debt/EBITDA (earnings before interest, tax, depreciation, and amortization)
Debt to Capital
Total Debt / (Total Debt + Total Equity)
Debt to Equity
Total Debt / Total Equity
Debt to Asset
Total Debt / Total Asset
About the Calculator / Features
This calculator effortlessly calculates the leverage ratios for any company. The user simply has to provide the following inputs.
- Total Debt (long term and short term)
- EBITDA (earnings before interest, tax and depreciation, and amortization)
- Total Equity
- Total Assets
Leverage Ratio Calculator
How to Calculate using Leverage Ratio Calculator
For using the calculator, the user simply has to insert the following figures in the calculator:
Total Debt
The amount of total debt can easily be obtained from the Balance Sheet of the company.
EBITDA
EBITDA can be calculated from the values available in the Profit & Loss Statements of the company.
Total Equity
The value of total equity is simply available on the Balance sheet of the Company.
Total Assets
The value of total assets can also be obtained from the Balance Sheet of the company.
Example of Leverage Ratio
Let’s understand this concept of leverage ratios with the help of an example. Company XYZ ltd. has a capital of $2,000,000 comprised of 40% debt and 60% equity. The EBIT of the company is $200,000. The amount of depreciation and amortization in the financial statements is $30,000. The assets of the company totaled to $1,500,000.
| Total Equity | $1,200,000 | 2,000,000*60% |
| Total Debt | $800,000 | 2,000,000*40% |
| EBITDA | $230,000 | 200,000+30,000 |
| Total Assets | $1,500,000 | – |
| Total Capital | $2,000,000 | – |
Debt to EBITDA = $800,000/$230,000 = 3.48
and, Debt to Capital = $800,000/$2,000,000 = 0.4
Debt to Equity = $800,000/$1,200,000 = 0.67
and, Debt to Assets = $800,000/$1,500,000 = 0.53
Interpretation of Leverage Ratio
Leverage Ratios tell about the financial health of the company and its capabilities to meet its financial liability and obligation.
Debt to EBITDA (earnings before interest, tax and depreciation, and amortization) suggest how much a company earns before paying interest. And how many times that earnings can cover its debt obligations. In fact, the higher ratio means that the debt is higher than earnings, and a similarly lower ratio implies that debt is lower than earnings, which is good.
The debt to Capital ratio shows the proportion of debt in the capital structure. The higher the ratio, the more the risk.
Debt to Equity defines the proportion of debt and equity in the capital structure.
Debt to Assets shows how much portion of the assets is sourced from the debt. In other words, how much of the debt is used to create physical and productive assets.
Cautions
Leverage ratios measure the solvency of the company and how they utilize the available funds. The company should try to keep its Debt to EBITDA, Debt to Capital, and Debt to Equity lower instead of at a reasonable level so that meeting obligations in time should not pose any problem.
