• user warning: Table './mysmp_drupal/cache_filter' is marked as crashed and should be repaired query: SELECT data, created, headers, expire, serialized FROM cache_filter WHERE cid = '1:21c41e8ef50637f5d1d9e446ca6d07b8' in /var/www/html/mysmp/includes/cache.inc on line 26.
  • user warning: Table './mysmp_drupal/cache_filter' is marked as crashed and should be repaired query: UPDATE cache_filter SET data = '<h1>Leverage Ratios</h1>', created = 1526901412, expire = 1526987812, headers = '', serialized = 0 WHERE cid = '1:21c41e8ef50637f5d1d9e446ca6d07b8' in /var/www/html/mysmp/includes/cache.inc on line 109.
  • user warning: Table './mysmp_drupal/cache_filter' is marked as crashed and should be repaired query: SELECT data, created, headers, expire, serialized FROM cache_filter WHERE cid = '1:7aab081c55f35976d592f08c040fd244' in /var/www/html/mysmp/includes/cache.inc on line 26.
  • user warning: Table './mysmp_drupal/cache_filter' is marked as crashed and should be repaired query: UPDATE cache_filter SET data = 'By using a combination of assets, debt, equity, and interest payments, <strong>leverage ratio\'s</strong> are used to understand a company\'s ability to meet it long term financial obligations.&nbsp; The three most widely used leverage ratio\'s are the debt ratio, debt to equity ratio, and interest coverage ratio.&nbsp; <br /><br />The <em><strong>debt ratio</strong></em><strong> </strong>gives an indication of a companies total liabilities in relation to their total assets.&nbsp; The higher the ratio, the more leverage the company is using and the more risk it is assuming.&nbsp; Both&nbsp;total assets and liabilities&nbsp;can be found on the <a href=\"/fundamental-analysis/balance-sheet.html\">balance sheet</a>.&nbsp; There is a nuance to be aware of with this formula.&nbsp; Mentioned above, these leverage ratios are meant to measure long term ability to meet financial obligations.&nbsp; Well, when we take a look at our Total liabilities number in more detail, items such as <a href=\"/fundamental-analysis/accounts-payable.html\">accounts payable</a> are included.&nbsp; This is a short term liability which is essential for the proper functioning of the business and not a liability in the sense that we are discussing it here.&nbsp; <br /><br /><img height=\"131\" alt=\"Debt Ratio\" width=\"300\" src=\"/files/u1/Debt-Ratio.png\" /><br /><br />The <strong><em>debt to equity ratio </em></strong>is the most popular leverage ratio and it provides detail around the amount of leverage (liabilities assumed) that a company has in relation to the monies provided by shareholders.&nbsp; As you can see through the formula below, the lower the number, the less leverage that&nbsp;a company is using.&nbsp; Again, like the debt ratio, we must understand the drawbacks of this formula.&nbsp; Total liabilities include operational liabilities that are required to run the business.&nbsp; These are not long term in nature and can distort the debt to equity ratio.&nbsp; Some will exclude accounts payable from the liabilities&nbsp;and/or intangible assets from the shareholder equity component.&nbsp; <br /><br /><img height=\"131\" alt=\"Debt To Equity Ratio\" width=\"300\" src=\"/files/u1/debt-to-equity-ratio.png\" /><br /><br />The <em><strong>interest coverage ratio </strong></em>tells us how easily a company is able to pay interest expenses associated to the debt they currently have.&nbsp; The ratio is designed to understand the amount of interest due as a function of a companies earnings before interest and taxes (EBIT).&nbsp; Some will actually replace EBIT with <a href=\"/fundamental-analysis/ebitda.html\">EBITDA</a>.&nbsp; It is different for each sector, but an interest coverage ratio below&nbsp;2 may pose a threat to the ability of a company to fulfill its interest obligations.&nbsp; The interest coverage ratio is very closely monitored because it is viewed as the last line of defense in&nbsp;a sense.&nbsp;&nbsp;A company can get by even when it is in a serious financial bind if it can pay its interest obligations.<br /><br /><img height=\"131\" alt=\"Interest Coverage Ratio\" width=\"300\" src=\"/files/u1/interest-coverage-ratio.png\" /><br />', created = 1526901412, expire = 1526987812, headers = '', serialized = 0 WHERE cid = '1:7aab081c55f35976d592f08c040fd244' in /var/www/html/mysmp/includes/cache.inc on line 109.
  • user warning: Table './mysmp_drupal/cache_filter' is marked as crashed and should be repaired query: SELECT data, created, headers, expire, serialized FROM cache_filter WHERE cid = '1:2fda152348bc4ae73408bf0b82608e9a' in /var/www/html/mysmp/includes/cache.inc on line 26.
  • user warning: Table './mysmp_drupal/cache_filter' is marked as crashed and should be repaired query: UPDATE cache_filter SET data = '<p>Tim Ord is a technical analyst and expert in the theories of chart analysis using price, volume, and a host of proprietary indicators as a guide to navigating through the markets.</p><p>Tim is in the Timers Digest Top 10 Rankings for his newsletter and is the Author of \"The Secret Science of Price and Volume”. Ord also contributes to the Stocks &amp; Commodities Magazine.</p>', created = 1526901412, expire = 1526987812, headers = '', serialized = 0 WHERE cid = '1:2fda152348bc4ae73408bf0b82608e9a' in /var/www/html/mysmp/includes/cache.inc on line 109.
  • user warning: Table './mysmp_drupal/cache_filter' is marked as crashed and should be repaired query: SELECT data, created, headers, expire, serialized FROM cache_filter WHERE cid = '1:4dd69529abed14a5c1c8f3ba7e22f8eb' in /var/www/html/mysmp/includes/cache.inc on line 26.
  • user warning: Table './mysmp_drupal/cache_filter' is marked as crashed and should be repaired query: UPDATE cache_filter SET data = '<p>Tradingsim.com provides the ability to simulate day trading 24 hours a day from anywhere in the world. TradingSim provides tick by tick data for every symbol on the Nasdaq, NYSE, and AMEX.</p><p>Use the fast forward and pause features to analyze your trading decisions with more precision.</p>', created = 1526901412, expire = 1526987812, headers = '', serialized = 0 WHERE cid = '1:4dd69529abed14a5c1c8f3ba7e22f8eb' in /var/www/html/mysmp/includes/cache.inc on line 109.
  • user warning: Table './mysmp_drupal/cache_filter' is marked as crashed and should be repaired query: SELECT data, created, headers, expire, serialized FROM cache_filter WHERE cid = '1:151e49b034b3ac8a98c1331980da8b69' in /var/www/html/mysmp/includes/cache.inc on line 26.
  • user warning: Table './mysmp_drupal/cache_filter' is marked as crashed and should be repaired query: UPDATE cache_filter SET data = '<h2>Related Videos</h2>', created = 1526901412, expire = 1526987812, headers = '', serialized = 0 WHERE cid = '1:151e49b034b3ac8a98c1331980da8b69' in /var/www/html/mysmp/includes/cache.inc on line 109.
  • user warning: Table './mysmp_drupal/cache_filter' is marked as crashed and should be repaired query: SELECT data, created, headers, expire, serialized FROM cache_filter WHERE cid = '1:e6ff5fe7efa34d641d697991ec512c61' in /var/www/html/mysmp/includes/cache.inc on line 26.
  • user warning: Table './mysmp_drupal/cache_filter' is marked as crashed and should be repaired query: UPDATE cache_filter SET data = '<h2>Related Articles</h2>', created = 1526901412, expire = 1526987812, headers = '', serialized = 0 WHERE cid = '1:e6ff5fe7efa34d641d697991ec512c61' in /var/www/html/mysmp/includes/cache.inc on line 109.
  • user warning: Table './mysmp_drupal/cache_filter' is marked as crashed and should be repaired query: SELECT data, created, headers, expire, serialized FROM cache_filter WHERE cid = '4:64dc950e564b7bb494892459d2858add' in /var/www/html/mysmp/includes/cache.inc on line 26.
  • user warning: Table './mysmp_drupal/cache_filter' is marked as crashed and should be repaired query: UPDATE cache_filter SET data = '<div class=\"left\">\n <p>copyright &copy; 2011 MYSMP.com. All rights reserved.</p>\n <a href=\"/\">Home</a> • <a href=\"/advertise\">Advertise</a> • <a href=\"/sitemap\">Sitemap</a> • <a href=\"/privacy-policy\">Privacy Policy</a>\n</div>\n\n<div class=\"right\">\n <p>Designed &amp; Developed by: bxCreative.com: <a target=\"_blank\" href=\"http://bxcreative.com\">Web design</a></p>\n</div>', created = 1526901412, expire = 1526987812, headers = '', serialized = 0 WHERE cid = '4:64dc950e564b7bb494892459d2858add' in /var/www/html/mysmp/includes/cache.inc on line 109.
  • user warning: Table './mysmp_drupal/cache_filter' is marked as crashed and should be repaired query: SELECT data, created, headers, expire, serialized FROM cache_filter WHERE cid = '1:ef414e50ef3bcd60831c79a8ccac7f37' in /var/www/html/mysmp/includes/cache.inc on line 26.
  • user warning: Table './mysmp_drupal/cache_filter' is marked as crashed and should be repaired query: UPDATE cache_filter SET data = '<h2 class=\"pane-title\"><a href=\"/investment-articles\">Investment Articles</a></h2><h2 class=\"pane-title\"><a href=\"/premium-services\">Premium Services</a></h2> <h2 class=\"pane-title\"><a href=\"/free-offers\">Free Offers</a></h2> <h2 class=\"pane-title\"><a href=\"/video\">Videos</a></h2>', created = 1526901412, expire = 1526987812, headers = '', serialized = 0 WHERE cid = '1:ef414e50ef3bcd60831c79a8ccac7f37' in /var/www/html/mysmp/includes/cache.inc on line 109.
  • user warning: Table './mysmp_drupal/cache_filter' is marked as crashed and should be repaired query: SELECT data, created, headers, expire, serialized FROM cache_filter WHERE cid = '1:7ab206dca588aa9858fab14b55f27503' in /var/www/html/mysmp/includes/cache.inc on line 26.
  • user warning: Table './mysmp_drupal/cache_filter' is marked as crashed and should be repaired query: UPDATE cache_filter SET data = '<p>16192 Coastal Highway<br />\nLewes, Delaware 19958</p>\n', created = 1526901412, expire = 1526987812, headers = '', serialized = 0 WHERE cid = '1:7ab206dca588aa9858fab14b55f27503' in /var/www/html/mysmp/includes/cache.inc on line 109.
  • user warning: Table './mysmp_drupal/cache_filter' is marked as crashed and should be repaired query: SELECT data, created, headers, expire, serialized FROM cache_filter WHERE cid = '1:fb9bc3d8197c3f70b5a896cc8bae29d6' in /var/www/html/mysmp/includes/cache.inc on line 26.
  • user warning: Table './mysmp_drupal/cache_filter' is marked as crashed and should be repaired query: UPDATE cache_filter SET data = '<a href=\"/\"><img src=\"/sites/all/themes/bx/images/logo.png\" /></a>', created = 1526901412, expire = 1526987812, headers = '', serialized = 0 WHERE cid = '1:fb9bc3d8197c3f70b5a896cc8bae29d6' in /var/www/html/mysmp/includes/cache.inc on line 109.

Leverage Ratios

By using a combination of assets, debt, equity, and interest payments, leverage ratio's are used to understand a company's ability to meet it long term financial obligations.  The three most widely used leverage ratio's are the debt ratio, debt to equity ratio, and interest coverage ratio. 

The debt ratio gives an indication of a companies total liabilities in relation to their total assets.  The higher the ratio, the more leverage the company is using and the more risk it is assuming.  Both total assets and liabilities can be found on the balance sheet.  There is a nuance to be aware of with this formula.  Mentioned above, these leverage ratios are meant to measure long term ability to meet financial obligations.  Well, when we take a look at our Total liabilities number in more detail, items such as accounts payable are included.  This is a short term liability which is essential for the proper functioning of the business and not a liability in the sense that we are discussing it here. 

Debt Ratio

The debt to equity ratio is the most popular leverage ratio and it provides detail around the amount of leverage (liabilities assumed) that a company has in relation to the monies provided by shareholders.  As you can see through the formula below, the lower the number, the less leverage that a company is using.  Again, like the debt ratio, we must understand the drawbacks of this formula.  Total liabilities include operational liabilities that are required to run the business.  These are not long term in nature and can distort the debt to equity ratio.  Some will exclude accounts payable from the liabilities and/or intangible assets from the shareholder equity component. 

Debt To Equity Ratio

The interest coverage ratio tells us how easily a company is able to pay interest expenses associated to the debt they currently have.  The ratio is designed to understand the amount of interest due as a function of a companies earnings before interest and taxes (EBIT).  Some will actually replace EBIT with EBITDA.  It is different for each sector, but an interest coverage ratio below 2 may pose a threat to the ability of a company to fulfill its interest obligations.  The interest coverage ratio is very closely monitored because it is viewed as the last line of defense in a sense.  A company can get by even when it is in a serious financial bind if it can pay its interest obligations.

Interest Coverage Ratio
Tim Ord
Ord Oracle

Tim Ord is a technical analyst and expert in the theories of chart analysis using price, volume, and a host of proprietary indicators as a guide...

Tradingsim.com
Day Trading Simulator

Tradingsim.com provides the ability to simulate day trading 24 hours a day from anywhere in the world. TradingSim provides tick by tick data for...

Send this article to a friend.

Enter multiple addresses on separate lines or separate them with commas.