Question: What are the financial leverage ratios and what do they measure?
Answer:
Financial leverage ratios are also called debt ratios. You may also find them called long-term solvency ratios. They measure the ability of the business to meet its long term debt obligations, such as interest payments on debt, the final principal payment on debt, and any other fixed obligations like lease payments.
These debt ratios allow the owner of the business to determine how well the business can meet its long-term debt obligations. These ratios are worth nothing, or very little, in isolation. You have to be able to do trend and industry analysis in order to be able to determine how well you are managing your debt position.
