Archive / Investment Adviser (Level 1) / Evaluating the Financial Position of Clients

nism-series-xa-leverage-ratio-calculation-total-debt-assets[ INVESTMENT ADVISER (LEVEL 1) ]

A family owns Total Assets worth ₹15,000,000 (Real Estate ₹1.0 Cr + Financial Investments ₹50 Lakhs) and has Total Debt Liabilities of ₹4,500,000 (Home Loan). What is their Leverage Ratio?

[ A ]70.0% (Solvency Ratio)

[ B ]30.0% (Total Liabilities / Total Assets)[ CORRECT ]

[ C ]45.0%

[ D ]42.9% (Debt-to-Net Worth)

Takeaway

The family's Leverage Ratio is 30.0%, computed as total debt liabilities divided by total assets.

Derivation

Step 1: Total Assets = ₹1.0 Cr (Real Estate) + ₹50 Lakh (Financial Investments) = ₹1.5 Cr = ₹15,000,000. Step 2: Total Debt = ₹4,500,000 (Home Loan). Step 3: Leverage Ratio = Total Liabilities / Total Assets = 4,500,000 / 15,000,000 = 0.30 = 30.0%. This ratio measures how much of the family's total asset base is financed by debt rather than owned outright, and the exam frequently pairs it with the closely related but distinct Solvency Ratio (Net Worth/Assets) and Debt-to-Net-Worth Ratio — candidates must recognize which denominator (Total Assets vs. Net Worth) each named ratio actually uses.

Why the others fail

A — 70.0% (Solvency Ratio)

70% is the Solvency Ratio (Net Worth / Total Assets = 10,500,000 / 15,000,000), a different metric measuring owned equity in assets, not the debt-to-asset Leverage Ratio being asked for.

C — 45.0%

45.0% does not correspond to either 4,500,000/15,000,000 or any other standard financial ratio derivable from the figures given in the problem — it is an unsupported number.

D — 42.9% (Debt-to-Net Worth)

42.9% is the Debt-to-Net-Worth ratio (4,500,000 / 10,500,000), which uses Net Worth as its denominator instead of Total Assets as the Leverage Ratio formula requires.