Leverage Ratio

A measure of the extent to which a firm’s creditors are financing the firm’s investments, rather than financing the firm itself. The ratio is expressed in different ways. For investment firms, a common expression is total long-term debt divided by total shareholders’ equity. For commercial banks and thrifts, the numerator and denominator are reversed, and the ratio is expressed as capital divided by total assets. All the ratios measure a company's ability to meet financial obligations. Regulators establish minimum leverage ratios. There are several different ratios but they all look at some aspect of debt, equity, expense and assets.