What is Financial Leverage Ratio?
The financial leverage ratio is any of several metrics that measure the extent to which a business is financed by debt rather than equity, with debt-to-equity and debt-to-assets being the two most widely used variants.
How It Works
- Debt-to-equity = total debt / total equity.
- Debt-to-assets = total debt / total assets.
- Higher leverage amplifies returns on equity but increases bankruptcy risk.
- Compared against industry medians and lender covenants.
Saudi Context
Saudi banks typically expect SME borrowers to maintain a debt-to-equity ratio below 2.0x, and industrial borrowers below 3.0x. The Saudi Industrial Development Fund applies stricter limits and frequently requires guarantees from the Saudi Industrial Development Bank or shareholders to support higher leverage during expansion phases.
Example
A Saudi manufacturer has SAR 30,000,000 in total debt and SAR 20,000,000 in equity. Debt-to-equity = 30,000,000 / 20,000,000 = 1.5x.