Leverage ratios measure which of the following?

• A. The extent to which a company has borrowed money
• B. The company's liquidity
• C. The company's profitability
• D. The efficiency of asset use

Answer: (A)

Leverage ratios assess how much a company relies on borrowed funds to finance its activities. They focus on long-term solvency and capital structure, comparing debt to equity or debt to assets to show the degree of financial risk from debt. This is why they measure the extent to which a company has borrowed money. They aren’t about short-term liquidity (ability to meet current obligations), profitability (earnings relative to sales or assets), or how efficiently assets are used to generate revenue. For example, debt-to-equity and debt ratio quantify indebtedness and illustrate leverage.