How Leverage Affects Credit Ratings

Leverage measures how much of the business is funded by debt relative to equity or earnings, and higher leverage generally translates to higher financial risk.

Key Leverage Metrics

•      Debt-to-equity ratio

•      Total debt to EBITDA (or Net Debt/EBITDA)

•      Debt to tangible net worth

Context Matters

The same leverage ratio can be viewed differently depending on the industry and the stability of cash flows — a capital-intensive, stable-cash-flow business (such as certain infrastructure assets) can often sustain higher leverage at a given rating level than a cyclical, less predictable business.

Agencies also look at the trend in leverage, not just the current level — rising leverage funding non-core diversification is generally viewed less favourably than leverage supporting a core-business expansion with a clear repayment plan.

Talk to FinMen Advisors — for help preparing for a rating exercise, write to marketing@finmen.in or call +91 77387 14680.

Disclaimer: This article is intended for general informational and educational purposes only and does not constitute financial, credit, investment, or legal advice. Credit ratings are assigned solely by SEBI-registered Credit Rating Agencies (such as CRISIL, ICRA, CARE Ratings, India Ratings, Brickwork, Acuite, and Infomerics) based on their own methodologies, policies, and the information available to them at the time of assessment. FinMen Advisors provides preparatory and advisory support to companies undergoing a rating exercise and does not issue, influence, or guarantee any rating outcome. Readers should exercise independent judgement and consult qualified professionals before making business or financial decisions.