Leverage ratios assess risk from "summary" of Loose Leaf Finance with Connect Access Card by Troy Adair,Marcia Millon Cornett,John Nofsinger
Leverage ratios are important tools for assessing risk in a company. These ratios provide insight into how much debt a company is using to finance its operations, which can help investors and analysts evaluate the financial health and stability of the firm. By analyzing leverage ratios, stakeholders can better understand the level of risk associated with investing in a particular company. One commonly used leverage ratio is the debt-to-equity ratio, which compares a company's total debt to its shareholders' equity. A high debt-to-equity ratio indicates that a company is relying heavily on debt to finance its operations, which can be risky because it means the company may have trouble meeting its debt obligations in the future. On the other hand, a low debt-to-equity ratio suggests that a company is using less debt and may be in a stronger financial position. Another important leverage ratio is the interest coverage ratio, which measures a company's ability to meet its interest payments on outstanding debt. A high interest coverage ratio indicates that a company is generating enough earnings to cover its interest expenses, reducing the risk of default. Conversely, a low interest coverage ratio suggests that a company may struggle to meet its interest obligations, increasing the risk of financial distress.- Leverage ratios provide valuable information about a company's financial risk profile. By analyzing these ratios, investors and analysts can assess the level of risk associated with investing in a particular company and make more informed decisions about where to allocate their capital. In this way, leverage ratios play a crucial role in evaluating the risk and return characteristics of potential investments.
