Chartered Financial Analyst (CFA) Level 1 Practice Exam

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Which of the following is NOT a type of leverage ratio?

Debt to assets ratio
Debt to capital ratio
Interest coverage ratio
Financial leverage ratio

The correct answer is: Interest coverage ratio

The interest coverage ratio is typically categorized as a measure of a company's ability to meet its interest obligations rather than as a leverage ratio. Leverage ratios are primarily intended to assess the extent to which a company is using debt to finance its assets. In contrast, the debt to assets ratio, debt to capital ratio, and financial leverage ratio all measure the relative level of debt in relation to assets or capital. - The debt to assets ratio indicates the proportion of a company's assets that are financed through debt, providing insight into the financial risk associated with a high level of borrowing. - The debt to capital ratio assesses the percentage of a company's capital that comes from debt, helping to evaluate the overall financial structure of the company. - The financial leverage ratio reflects the degree to which a company uses debt to acquire additional assets, giving an indication of risk based on that leverage. Therefore, the interest coverage ratio stands apart from these leverage ratios because it focuses on the relationship between earnings and interest expenses rather than the level of debt itself.