What is the formula for the Leverage Ratio?

The Leverage Ratio measures the degree to which a company is utilizing borrowed money (debt) to finance its assets. Specifically, the formula is calculated as Total Debt divided by EBITDA (Earnings Before Interest, Taxes, Depreciation, and Amortization). This representation captures how much debt a company carries relative to its earnings ability, providing insights into financial stability and risk.

High leverage implies a company may struggle to meet its debt obligations during downturns, as it relies heavily on borrowed funds to operate. In contrast, a lower leverage ratio suggests a more comfortable situation where the company might have more equity relative to its debts, often associated with reduced financial risk.

The other options provided do not reflect the concept of leverage directly. Total Assets over Equity measures asset efficiency, while Current Assets over Current Liabilities indicates liquidity rather than leverage. Net Income over Total Assets explores profitability concerning total assets, missing the focus on debt in the context of the leverage ratio.