Financial Intelligence, Revised Edition: A Manager's Guide to Knowing What the Numbers Really Mean

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Leverage Ratios

The Balancing Act

Leverage ratios let you see how—and how extensively—a company uses debt. Debt is a loaded word for many people: it conjures up images of credit cards, interest payments, an enterprise in hock to the bank. But consider the analogy with home ownership. As long as a family takes on a mortgage it can afford, debt allows the family to live in a house that it might otherwise never be able to own. What’s more, homeowners can deduct the interest paid on the debt from their taxable income, making it even cheaper to own that house. So it is with a business: debt allows a company to grow beyond what its invested capital alone would allow, and indeed to earn profits that expand its equity base. A business can also deduct ...