What does a leverage ratio measure in a company?

• A. The proportion of company equity to total revenue
• B. The degree of financing through debt relative to its equity or assets
• C. The overall liquidity of the company's assets
• D. The efficiency of asset utilization in generating profit

Answer: (B)

The leverage ratio is crucial for assessing a company's financial structure, specifically the extent to which it relies on debt to finance its operations. It provides insights into the degree of risk associated with that debt in relation to equity or total assets. A higher leverage ratio indicates that a company has a greater proportion of debt in its capital structure, which can amplify both potential returns and risks during financial downturns.

Understanding this measurement is fundamental for investors, creditors, and analysts, as it helps them evaluate the company’s ability to meet its financial obligations and sustain operations under various economic conditions. The leverage ratio serves as a critical indicator of financial health, revealing how much debt a company is using to finance its growth compared to its equity.