What is assessed by the Leverage Ratio?

The Leverage Ratio is primarily designed to assess the relationship between a company's debt and its equity or total assets. This metric provides insight into how much of the company's capital structure is financed through debt versus equity. A higher leverage ratio indicates a greater reliance on borrowed funds, which can amplify both potential returns and risks. By evaluating this ratio, investors and financial analysts can gauge the company’s financial health and risk profile, particularly in terms of its ability to meet debt obligations.

In the context of real estate, understanding the leverage ratio is crucial because it affects not only investment decisions but also how properties are financed. This can influence cash flow, profitability, and overall investment strategy. It reflects the balance between utilizing borrowed money to increase the potential return on equity and the inherent risks that come with higher levels of debt.