What is Leverage Ratios?
Nexa Consultancy | Startup & Finance Glossary
Leverage Ratios are financial metrics that measure the amount of capital that comes in the form of debt (loans). They assess a company's ability to meet its financial obligations. The most common leverage ratios are the Debt-to-Equity Ratio and the Debt-to-Asset Ratio.
Base Term for Startups: Most early-stage startups have very little debt, so their leverage ratios are low. As they mature, they might take on venture debt, which would increase their financial leverage. Investors look at these ratios to gauge the financial risk of the company.
Base Term for Businesses: While leverage can amplify returns, too much debt increases the risk of bankruptcy if the company cannot make its interest payments.
Base Term Calculation: Debt-to-Equity Ratio = Total Debt / Total Shareholders' Equity
Base Term Example: A company with ₹2 Crore in debt and ₹4 Crore in equity has a debt-to-equity ratio of 0.5.