How to Calculate Leverage Ratio

A high leverage ratio indicates high debt relative to shareholders' equity.

A high leverage ratio indicates high debt relative to shareholders' equity.

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.

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.

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.

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.

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Mark Kennan is a writer based in the Kansas City area, specializing in personal finance and business topics. He has been writing since 2009 and has been published by "Quicken," "TurboTax," and "The Motley Fool."

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