Financial Glossary
Leverage Ratio
A leverage ratio is any metric that compares a company's debt to another financial measure such as equity, total assets, or earnings. Common examples include debt-to-equity, debt-to-assets, and debt-to-EBITDA. Higher leverage ratios indicate greater reliance on borrowed money, which can amplify returns but also raises the risk of distress if earnings or cash flow fall.
Problem & Application
For a real-estate investor or campground owner carrying mortgages and equipment loans, leverage ratios show how much room remains before lenders view the balance sheet as overextended. Tracking these ratios over time helps anticipate whether a new acquisition can be financed or whether the business should pay down debt first. Lenders and partners often set covenant thresholds on these ratios, so monitoring them avoids surprises during financing.
In Short
Leverage ratios translate a balance sheet into a simple read on financial risk and borrowing capacity, making them central to financing and growth decisions.