How do you determine a company's leverage ratio?

To determine a company's leverage ratio, the approach involves assessing the level of debt in relation to its assets or equity. The most commonly used measure is the debt-to-assets ratio or the debt-to-equity ratio.

By dividing total debt by total assets, you can gauge what proportion of the company's assets are financed through debt. This provides insights into the level of financial risk the company is taking on. A higher ratio indicates greater leverage, meaning the company relies more heavily on borrowed funds, which can affect its solvency and financial stability.

Similarly, dividing total debt by total equity offers a perspective on how leveraged the company is in terms of shareholder funding versus creditor obligations. Thus, this ratio serves as a critical metric for stakeholders analyzing the financial structure and risk profile of the company.

Other choices, such as total revenue divided by total expenses or the ratio of current assets to current liabilities, are related to profitability and liquidity rather than leverage specifically. Total equity divided by total debt reflects an inverse approach to leverage, where the focus is on equity rather than debt levels.