🔍 What is leverage?
Leverage evaluates how a company uses debt in relation to equity. It measures what portion of operations is financed through debt versus shareholder capital.
💡 Why is it important?
The debt-to-equity ratio is a key tool to assess financial health. It shows how assets are financed and the level of risk assumed by investors and creditors.
🎯 Desired range or level
What is considered “good” varies by industry and company size. In general, a lower ratio means lower default risk, since more equity is being used.
📊 Key Indicators
Debt-to-Equity Ratio
🔍 What is it?
Total debt divided by equity. Indicates the proportion of financing from debt versus own capital.
💡 Why is it important?
Helps identify how dependent a company is on debt and estimate stakeholder risk. It also measures solvency to cover interest expenses and other obligations.
🎯 Target range
If greater than 1, the company has more debt than equity, which reflects higher risk. Should be analyzed considering industry and company size.
🔣 Formula
Debt-to-Equity Ratio = Total Debt / Equity
Debt-to-Operating Income
🔍 What is it?
Ratio between total debt and operating income. Shows the company’s ability to generate enough resources to cover debt.
💡 Why is it important?
Indicates whether operating earnings are sufficient to manage debt obligations.
🎯 Target range
A lower ratio indicates better operating performance relative to debt levels.
🔣 Formula
Debt-to-Operating Income = Total Debt / Operating Income
✅ Actions to improve leverage
Reduce existing debt through efficient cash flow management.
Refinance debt at lower rates or under better conditions.
Convert non-core assets into cash to pay down debt.