These ratios compare the overall debt load of a company to its assets or equity, showing how much of the company’s assets belong to shareholders and creditors. If shareholders own more assets, the company is said to be less leveraged. If creditors own a majority of assets, the company is said to be highly leveraged. Financial leverage ratios help management and investors understand ​the risk level of the capital structure of a company.​​​

Debt Ratio

A company’s debt ratio (or “debt-to-asset” ratio) measures its total liabilities against its total assets. The ratio is expressed as a percentage. It implies the company’s ability to satisfy its liabilities with its assets, or how many assets the company must sell to pay all its liabilities. It shows the company’s overall debt burden. A ratio of 0.5% or less is seen as favorable, indicating stability and longevity. A ratio of 1 means that total liabilities equals total assets. In other words, the company would have to sell off all of its assets in order to pay off its liabilities.

Debt-to-Equity Ratio

The debt-to-equity ratio compares a company’s total debt to total equity, indicating the percentage of company financing that comes from creditors and investors. A higher debt-to-equity ratio indicates that more creditor financing (bank loans) is used than investor financing (shareholders The debt-to-equity ratio is considered a balance sheet ratio because all of the elements are reported on the balance sheet. A debt-to-equity ratio of 1 would mean that investors and creditors have an equal stake in the business assets. A lower debt-to-equity ratio usually implies a more financially stable business. 

Equity Ratio

The equity ratio measures the value of assets that are financed by owners’ investments by comparing the total equity in the company to the total assets. In other words, after all of the liabilities are paid off, how much of the remaining assets the investors will end up with. The equity ratio also measures how much of a firm’s assets were financed by investors, or the investors’ stake in the company. A higher equity ratio is seen as favorable because it shows that investors have confidence and are willing to back this company and that the company is more sustainable and less risky