Calculate the financial leverage ratio, debt-to-equity, debt-to-assets, and debt-to-capital ratio from a company’s total assets, total debt, and total equity.
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Financial Leverage Ratio Formula
The financial leverage ratio shows how much a company relies on debt relative to its equity or assets. This calculator supports four common leverage measures, each with its own formula.
Financial Leverage Ratio = Total Assets / Total Equity
Debt-to-Equity Ratio = Total Debt / Total Equity
Debt-to-Assets Ratio = Total Debt / Total Assets
Debt-to-Capital Ratio = Total Debt / (Total Debt + Total Equity)
Where Total Assets is everything the company owns, Total Equity is the owners’ or shareholders’ stake, and Total Debt is the company’s interest-bearing borrowings. In the financial leverage ratio, a value of 2 means total assets are twice the size of equity, so about half of the assets are funded by liabilities. The debt-to-equity, debt-to-assets, and debt-to-capital ratios each compare debt to a different base so you can read risk from more than one angle.
Typical Leverage Ratio Values
Use the ranges below as a general guide. Healthy levels vary widely by industry, so compare a company against peers in the same sector rather than against a single fixed target.
| Debt-to-Equity Ratio | General Interpretation |
|---|---|
| Below 0.5 | Low leverage, conservative funding |
| 0.5 to 1.5 | Moderate leverage, common for many firms |
| 1.5 to 2.5 | Higher leverage, more reliance on debt |
| Above 2.5 | Aggressive leverage, higher financial risk |
| Financial Leverage Ratio (Assets / Equity) | General Interpretation |
|---|---|
| 1.0 to 2.0 | Most assets funded by equity |
| 2.0 to 3.0 | Balanced use of debt and equity |
| Above 3.0 | Heavy reliance on debt to fund assets |
Example Problems
Example 1. A company reports total assets of $500,000 and total equity of $200,000. The financial leverage ratio is 500,000 / 200,000 = 2.5. Total assets are 2.5 times equity, so 60 percent of the assets are funded by liabilities.
Example 2. A company has total debt of $150,000 and total equity of $200,000. The debt-to-equity ratio is 150,000 / 200,000 = 0.75. The company uses 75 cents of debt for every dollar of equity.
FAQ
What is a good financial leverage ratio?
There is no single good value because it depends on the industry. Capital-heavy sectors such as utilities and banking often carry higher ratios than software or services firms. Compare the result against direct competitors and the company’s own history.
Is a higher leverage ratio better?
Not on its own. More leverage can raise returns on equity when business is strong, but it also increases the risk of distress if earnings fall, because interest and principal still have to be paid.
What is the difference between debt-to-equity and debt-to-capital?
Debt-to-equity divides total debt by equity, while debt-to-capital divides total debt by the sum of debt and equity. Debt-to-capital is always between 0 and 1, which makes it easy to read as the share of funding that comes from debt.