Leverage Ratios

The Balancing Act

Leverage ratios show you how—and how extensively—your business or any other company is using debt. Debt is a loaded word for many people: it conjures up images of credit cards, interest payments, an enterprise in hock to the bank. But consider the analogy with home ownership. As long as a family takes on a mortgage it can afford, debt allows them to live in a house that they might otherwise never be able to own. What’s more, homeowners can deduct the interest paid on the debt from their taxable income, making it even cheaper to own that house. So it is with a business: debt allows a company to grow beyond what its invested capital alone would allow and, indeed, to earn profits that expand its equity base. ...

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