Calculation Of Leverage Ratio

Leverage Ratio Formula:

\[ \text{Leverage Ratio} = \frac{\text{Total Debt}}{\text{EBITDA}} \]

Leverage Ratio:

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1. What is the Leverage Ratio?

The Leverage Ratio is a financial metric that measures the amount of debt a company has relative to its earnings before interest, taxes, depreciation, and amortization (EBITDA). It indicates a company's ability to pay off its incurred debt.

2. How Does the Calculator Work?

The calculator uses the Leverage Ratio formula:

\[ \text{Leverage Ratio} = \frac{\text{Total Debt}}{\text{EBITDA}} \]

Where:

\( \text{Total Debt} \) — The sum of all company's debts and liabilities (currency)
\( \text{EBITDA} \) — Earnings Before Interest, Taxes, Depreciation, and Amortization (currency)

Explanation: The ratio shows how many years it would take for a company to pay back its debt if EBITDA and debt remained constant.

3. Importance of Leverage Ratio Calculation

Details: The Leverage Ratio is crucial for assessing a company's financial health, creditworthiness, and risk level. It helps investors and creditors evaluate the company's ability to meet its debt obligations.

4. Using the Calculator

Tips: Enter total debt and EBITDA in the same currency units. Both values must be positive numbers, with EBITDA greater than zero for valid calculation.

5. Frequently Asked Questions (FAQ)

Q1: What is considered a good Leverage Ratio?
A: Generally, a ratio below 3 is considered healthy, between 3-5 indicates moderate risk, and above 5 suggests high financial risk, though this varies by industry.

Q2: How does Leverage Ratio differ from Debt-to-Equity Ratio?
A: Leverage Ratio compares debt to operating earnings (EBITDA), while Debt-to-Equity Ratio compares total debt to shareholders' equity.

Q3: Why use EBITDA instead of net income?
A: EBITDA provides a clearer picture of operating performance by excluding non-operating expenses like interest, taxes, depreciation, and amortization.

Q4: What are the limitations of the Leverage Ratio?
A: It doesn't account for variations in interest rates, debt maturity schedules, or the quality of EBITDA. It should be used alongside other financial metrics.

Q5: How often should Leverage Ratio be calculated?
A: It should be calculated regularly, typically quarterly or annually, to monitor changes in a company's financial leverage over time.