1. What is Debt Leverage?

Debt leverage measures the proportion of a company's capital that comes from debt. It indicates how much debt a company is using to finance its assets relative to the value of shareholders' equity.

2. How Does the Calculator Work?

The calculator uses the leverage formula:

Where:

• \( Debt \) — Total debt amount in USD
• \( Equity \) — Total shareholders' equity in USD

Explanation: The ratio shows what percentage of the company's capital structure is financed by debt.

3. Importance of Leverage Calculation

Details: Understanding leverage is crucial for assessing financial risk. Higher leverage means greater financial risk but also potential for higher returns on equity.

4. Using the Calculator

Tips: Enter both debt and equity amounts in USD. Both values must be non-negative and their sum must be greater than zero.

5. Frequently Asked Questions (FAQ)

Q1: What is a good leverage ratio?
A: This varies by industry, but generally ratios below 0.5 (50%) are considered conservative, while ratios above 0.7 (70%) may be risky.

Q2: How is leverage different from debt-to-equity?
A: While related, debt-to-equity is Debt/Equity, whereas leverage is Debt/(Debt+Equity). Both measure financial risk but on different scales.

Q3: Can leverage be greater than 1?
A: No, leverage ranges from 0 (no debt) to 1 (all debt, no equity), though 1 is theoretically impossible as it would imply zero equity.

Q4: Why do companies use leverage?
A: Companies use debt to take advantage of tax benefits (interest is tax-deductible) and to potentially increase returns to shareholders.

Q5: What are the risks of high leverage?
A: High leverage increases bankruptcy risk and makes the company more vulnerable to economic downturns or rising interest rates.