Calculating Financial Ratios Leverage Ratios

In addition to vertical and horizontal analysis of financial statements, managers, creditors, and investors also study comparisons among various components on the statements. These comparisons are expressed as ratios and are known as financial ratios. Leverage ratios show how and to what degree a company has financed its assets. When firms borrow money to finance assets, they are using financial leverage. Investors and creditors alike are particularly interested in the leverage ratios because the greater the leverage a firm has used, the greater the risk of default on interest and principal payments. Such situations could lead the firm into eventual bankruptcy.