Leverage ratio
Principles of Finance glossary · Cost of Capital & Capital Structure
Definition
A measure of the firm's use of debt financing.
Leverage ratio in plain English
A leverage ratio tells you how much of a company is fueled by borrowed money versus the owners' own money. 'Debt financing' just means paying for things with loans you must repay, rather than with cash the owners put in. It's like buying a $300,000 house with a $240,000 mortgage: you control a big asset with only a little of your own money, which magnifies both your gains and your risks. A high leverage ratio means lots of debt, so potentially bigger profits, but also a scarier fall if things go wrong.
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