Leverage Ratios

A

Leverage ratios are financial ratios used to evaluate a company's debt level and its ability to meet its financial obligations. They measure the extent to which a company has borrowed money to finance its operations and investments, and the level of risk associated with its debt.

Option A is the correct answer. Leverage ratios are primarily designed to measure a company's capital structure, which refers to the way a company finances its assets and operations through a mix of debt and equity. The leverage ratios help to determine the proportion of a company's assets that are financed by debt versus equity. In general, a higher debt-to-equity ratio indicates a higher level of financial risk for the company.

Common leverage ratios used in financial analysis include the debt-to-equity ratio, debt-to-capital ratio, and interest coverage ratio. The debt-to-equity ratio compares a company's total debt to its equity, while the debt-to-capital ratio compares a company's total debt to its total capitalization (which includes both debt and equity). The interest coverage ratio measures a company's ability to meet its interest payments on outstanding debt from its operating earnings.

Leverage ratios are important for investors, creditors, and analysts as they provide insights into a company's financial health and risk profile. A high debt-to-equity ratio may indicate that a company is highly leveraged, which can increase the risk of default or bankruptcy in case of adverse economic conditions. On the other hand, a low debt-to-equity ratio may indicate that a company is conservative in its financing approach and has a lower level of financial risk.

In summary, leverage ratios are financial ratios used to evaluate a company's capital structure and level of financial risk associated with its debt. They help investors, creditors, and analysts assess a company's ability to meet its financial obligations and its overall financial health.