Leverage (debt) ratios help measure what?

Leverage ratios, commonly referred to as debt ratios, specifically serve to measure a company's reliance on borrowed funds to finance its operations and growth. By analyzing these ratios, such as the debt-to-equity ratio or debt-to-assets ratio, stakeholders can gain insight into how much of the company’s assets or equity are financed through debt. A higher leverage ratio indicates that the company is more reliant on debt as a source of funding, which can signal greater financial risk, especially during periods of low revenue or economic downturns. Understanding the level of leverage is crucial for assessing a company’s financial health, risk profile, and the potential implications of high debt levels on profitability and operational flexibility. This focus on borrowed funds distinguishes leverage ratios from metrics that evaluate operational efficiency, market valuation, or return on investments.