Leverage ratios and financial Leverage refers to the use of debt finance.
While debt capital is a cheap source of finance, it is also a riskier source of finance.
Leverage ratios help in assessing the risk arising from the use of debt capital. The Debt to equity ratio shows the company’s equity that it has against its debt to back it up and this ratio should be low since that will mean more protection to creditors and this is a good sign for investors as well.
Tesco’s ratio for 2005 was 0.56, 2006 was 0.64, 2007 was 0.59, 2008 was 0.53 and in 2009 its 0.59. This ratio over the years is good because the equity compared to debt is comparatively more but of course the company can improve the ratios because it’s good but not remarkable. But it shows they have a good debt to equity ratio which will attract investors since it’s a safe company to invest in. The Debt to asset ratio of the organization measures the extent to which borrowed funds support the firm’s assets. Tesco’s ratios for 2005 was 0.25, 2006 was 0.27, 2007 was 0.25, 2008 was 0.30 and in 2009 it is 0.38. This shows that the company has a good amount of assets to back its debt and this ratio should be low so in terms of assets the company is strong enough to back its debt. The otherwise increasing trend in the ratio shows the company is strategizing to improve its asset management ratios and they are increasing assets to back their debts thus the ratio shows efficiency overall
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