A leverage ratio is a financial metric used to assess the extent to which a company's operations are funded by debt as opposed to equity. It's a measure of the proportion of debt in a company's capital structure. The leverage ratio is calculated by dividing the company's total debt by its equity or capital. This ratio provides insights into the company's financial risk and its ability to cover debt obligations.

A high leverage ratio indicates that a significant portion of the company's funding comes from debt, which can potentially amplify both gains and losses. While using debt can magnify returns in favorable conditions, it also increases the financial risk if the company faces challenges or economic downturns. On the other hand, a low leverage ratio suggests that the company relies more on equity financing, which could provide stability but might limit potential growth.

Leverage ratios are commonly used by investors, lenders, and analysts to assess a company's financial health and risk profile. Different industries and sectors may have varying levels of acceptable leverage ratios, as risk tolerance varies. It's crucial for companies to strike a balance between debt and equity financing that aligns with their business strategies and risk tolerance.