From the course: Running a Profitable Business: Understanding Financial Ratios
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Leverage ratios
From the course: Running a Profitable Business: Understanding Financial Ratios
Leverage ratios
- So let's look at some specific measures of leverage, measures that are commonly used. Investors put in their investment in the company. But if that investment is not enough to buy all of the assets they need to fulfill their business objectives, they need to borrow money, they need to leverage their investment. That makes the business larger with the same initial shareholder investment. That's reflected in the assets-to-equity ratio, a measure of leverage. With more leverage, a company's return on equity can be higher even with the same amount of shareholder investment. Debt ratio. Very simple measure. Total liabilities divided by total assets, the fraction of financing that was obtained through borrowing. We see for Nordstrom about 75%, for Dillard's about 50%. What does that 75% mean? Of all the money that Nordstrom needed to buy its assets, it borrowed about 75%. Dillard's borrowed about 50%. The rule…
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