Katelynn's Report

Katelynn's Report

(US Market)


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Leverage Ratio

Similar to debt equity ratio, leverage ratio is used for evaluating solvency and capital structure of a company. In Katelynn's Report, leverage ratio is calculated as Total Assets/Shareholder's Equity (Collinear with debt equity ratio. No additional contribution in multiple regression), which is the most widely used equation (Note that there are different ways to calculate leverage ratio. E.g. banks may use the equation Total Debt/12 Month EBITDAX, which is better for estimating how many fiscal years are needed to payoff the debt). High leverage ratio will undoubtedly constrain a company's access to additional low-cost bank capital. On the other hand, a very low leverage ratio may be a sign that operating margins are too tight. Leverage ratio has industry specific distribution. So usually it only makes sense to compare leverage ratio of copmanies within the same industry. When compare leverage ratio of companies from different industries, it is better to compare their relative performance in corresponding industry. Katelynn's Report assumes low leverage ratio is generally more preferred, thus lower leverage ratio has better performance (i.e. higher quantile ranking).

The figures below shows the distribution of leverage ratio on the whole market (left) and in technology sector (right) as of 2017-01-20 (solid blue), compared with 1 year ago (dashed pink). The two colored vertical lines marked the location of AAPL (Apple Inc.) and GOOG (Alphabet Inc.). Majority of companies have leverage ratio between 1 and 2. Generally, leverage ratio above 2 is considered high in debt burden, and a harder time to recover during economic downturn due to high interest expenses.

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Below shows the leverage ratio of AAPL and GOOG as of 2017-01-20, as well as their performance relative to industry peers, sector peers, and the whole market.

AAPL Leverage Ratio:


GOOG Leverage Ratio:


AAPL and GOOG have distinct performances in leverage ratio. The leverage ratio of AAPL is higher (poorer) than industry and sector median (lower than 43% of industry peers, and 35% of sector peers). The leverage ratio of GOOG is among the best in the market as of 2017-01-20.