Leverage is using debt to finance investments.
Leverage ratio is the ratio between the size of the debt and some metric for the value of the investment.

There are several financial leverage ratios, for companies the debt-to-equity ratio is the most common one: Total debt / shareholder equity.

As an example we can use the debt-to-equity ratio for a home with a market value of $110,000 and a mortgage of $100,000: Debt is $100,000 and equity is $10,000 (market value minus debt), giving a debt-to-equity ratio of 100,000/10,000 = 10.

The general idea is that very low leverage means that a company isn't growing as quickly as it could, while a very high leverage means that a company is vulnerable to temporary setbacks in sales or increases in interest rate.


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