Leverage And Profitability Ratio class is for the HSC candidates or for the students of classes 11 and 12. This class is a part of HSC (11-12) [ এইচএসসি (১১-১২) ], Finance and Banking 1st paper. You can find it in the Finance 1st Paper, chapter 4, the topic name is “Leverage And Profitability Ratio”. This class will help you in your upcoming HSC examination.

Table of Contents

Leverage And Profitability Ratio

What Is a Leverage Ratio?

A leverage ratio is any one of several financial measurements that look at how much capital comes in the form of debt (loans) or assesses the ability of a company to meet its financial obligations. The leverage ratio category is important because companies rely on a mixture of equity and debt to finance their operations, and knowing the amount of debt held by a company is useful in evaluating whether it can pay off its debts as they come due. Several common leverage ratios are discussed below.

KEY TAKEAWAYS

A leverage ratio is any one of several financial measurements that assesses the ability of a company to meet its financial obligations.
A leverage ratio may also be used to measure a company’s mix of operating expenses to get an idea of how changes in output will affect operating income.
Common leverage ratios include the debt-equity ratio, equity multiplier, degree of financial leverage, and consumer leverage ratio.
Banks have regulatory oversight on the level of leverage they can hold.

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What Does a Leverage Ratio Tell You?

In most cases, leverage ratios assess the ability of a company to meet its financial obligations. Too much debt can be dangerous for a company and its investors. However, if a company’s operations can generate a higher rate of return than the interest rate on its loans, then the debt may help to fuel growth.

Uncontrolled debt levels can lead to credit downgrades or worse. On the other hand, too few debts can also raise questions. A reluctance or inability to borrow may indicate that operating margins are tight.

A leverage ratio may also be used to measure a company’s mix of operating expenses to get an idea of how changes in output will affect operating income. Fixed and variable costs are the two types of operating costs; depending on the company and the industry, the mix will differ.

Another leverage ratio is the consumer leverage ratio. This ratio looks at the level of consumer debt compared to disposable income and is used in economic analysis and by policymakers.