Leverage (debt) ratios are used to assess what aspect of a company?

Leverage ratios, often referred to as debt ratios, specifically focus on the extent to which a company is financing its operations through debt. This ratio evaluates the proportion of debt compared to equity in a firm’s capital structure and indicates how much of the company’s assets are financed by borrowing. Understanding this relationship is crucial, as high leverage could suggest higher risk due to the obligation to pay back debt regardless of the company's financial performance.

Using leverage ratios helps stakeholders, including investors and creditors, determine the financial risk and sustainability of a company's operations. A company with a higher level of debt may face difficulties in meeting its obligations during downturns, while a lower debt level might indicate more stability. This assessment of capital sourced from debt is vital for understanding not just the financial health of a company, but also its strategic positioning and risk profile.