With the help of the following leverage ratios (also called debt ratios), the firm’s reliance on debt financing can be assessed.
- Liabilities-to-equity ratio
- Interest coverage
Liabilities-equity ratio indicates the proportion of debt financing and equity financing. It shows whether the firm is indebted. It is calculated as the total liabilities (both short- and long-term) divided by the total equity.
This ratio shows the ease with which the firm can meet its interest payments: the euro amount of Earnings Before Interest and Tax (EBIT) available for each euro of required interest payment. It indicates the degree of risk associated with the firm’s debt policy.