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Leverage Ratio

Leverage ratio identify the source of a firm’s capital-owners or outside creditors. The term leverage refers to the fact that using capital with a fixed interest charge will “amplify” either profits or losses in relation to the equity of holders of common stock. The most commonly used ratio is total assets. Total debt includes current liabilities and long-term liabilities. This ratio is a measure of the percentage of total funds provide by debt. A total debt-total assets ratio higher than 0.5 is usually considered safe only for firms in stable industries .

Leverage ratio is a bank’s capital divided by its assets.

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