What does the term 'leverage ratio' refer to in finance?

The term 'leverage ratio' specifically refers to ratios that measure how much a company is using borrowed funds to finance its operations and investments. This is a crucial concept in finance because it provides insight into the company's financial structure and risk profile. High leverage ratios can indicate that a company is heavily reliant on debt, which may amplify returns during good times but also increases the risk of financial distress during downturns or when cash flows become unstable.

By analyzing leverage ratios, investors and analysts can assess a company's ability to meet its debt obligations and understand the potential risks associated with its capital structure. This understanding helps in making informed decisions regarding investment and lending.

In contrast, profitability ratios measure how effectively a company generates profit relative to its revenues, while operational efficiency ratios assess how well a company uses its assets and manages its operations. Ratios indicating client satisfaction would focus more on qualitative measures rather than financial leverage, making them outside the scope of leverage ratios.