Leverage refers to the ability to lift a heavier load using a fulcrum and a lever. The common image is a board on a triangular pivot point with a heavy weight (M1) on one end and a lighter weight (M2) on the other. As the lever shifts towards the lighter load it starts to lift the heavier weight. In effect, as the distance ‘b’ gets longer, it becomes easier to lift M1. This principle works with finances too. How so?
The debt ratio measures the overall liabilities as a percentage of all assets. It is customarily a tool used to measure leverage used in business. The various business sectors utilize certain standards and parameters for debt and the debt ratio is an excellent barometer to measure compliance.
The debt ratio is more effective with capital intensive operations such as real estate, heavy equipment operators and transportation.