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A company's leverage ratio indicates how much of its assets are paid for with borrowed money. A higher ratio means that more of the company's assets are paid for with debt. For example, a leverage ratio of 2:1 means that for every $1 of shareholders' equity the company owes $2 in debt. High debt can hamstring a company's cash flow because of large interest payments and limit its ability to borrow more money. However, interest paid on debt may be tax-deductible and allow the company to take advantage of opportunities it might not otherwise be able to afford.
Step 1
Look up the company's total debt and total stockholders' equity in its annual report. The total debt includes both short-term and long-term debt liability. The shareholder's equity can be calculated by multiplying the number of shares outstanding by the price per share.
Step 2
Divide the company's total debt by the shareholders' equity. For example, if the company has $2 million in debt and $3 million in shareholders' equity, divide $2 million by $3 million to get 1.5.
Step 3
Replace "A" with the result in the ratio A:1. In this example, replace A with 1.5 to find that leverage ratio for the company is 1.5:1. This means that the company owes $1.50 in debt for every $1 of stockholders' equity.
