How is the leverage ratio calculated?

The leverage ratio is an important financial metric used to evaluate the degree to which a company is utilizing debt to finance its assets. The correct calculation for the leverage ratio is obtaining a clear understanding of how much a company is financed by debt relative to its equity or capital.

To calculate the leverage ratio correctly, you take the total assets of a company and divide it by the total capital. By doing this, you derive a figure that indicates how many dollars of assets exist for every dollar of capital. This ratio reflects a company's financial structure, showing the relationship between its capital and its assets and helping assess the level of financial risk associated with its capital structure.

While the other options may touch upon related financial concepts, they do not accurately describe the standard leverage ratio calculation. Understanding this ratio is critical for financial analysis, as it helps stakeholders evaluate whether a company is over-leveraged or efficiently using leverage to grow its operations.