# Financial Leverage Ratio: A Complete Guide

July 19, 2022

A financial leverage ratio compares a company’s total debt to its total assets. The ratio can be calculated by dividing total liabilities by total assets, or the sum of all long-term debt, short-term debt and capital leases by the sum of all long-term assets and short-term assets.

The financial leverage ratio is used to compare companies with different asset compositions. Companies that have a high proportion of debt can be viewed as more risky than firms with lower levels of debt, since they rely more on borrowed money instead of their own cash flow.

## How is financial leverage ratio calculated?

The financial leverage ratio is also known as the debt-to-equity ratio. It is used to measure the extent to which a company uses borrowed money to fund its operations. It is calculated by dividing total liabilities by total shareholder equity. The higher the ratio, the more debt a company has.

The financial leverage ratio can be used in conjunction with other measures of financial risk, such as liquidity and profitability, to determine whether or not a company's debt levels are too high. If you're considering investing in a company that has a high financial leverage ratio, it's important that you understand exactly why they have so much debt and what they plan to do with it.

## What is the financial leverage ratio formula?

The financial leverage ratio measures the relationship between debt and equity in a company's capital structure. This ratio is also known as the debt-to-equity ratio.

The financial leverage ratio formula is as follows:

Leverage ratio = Total liabilities / Total shareholders' equity

## What does a leverage ratio of 1.5 mean?

A financial leverage ratio is a measure of the amount of debt that a company uses to finance its assets. The higher the ratio, the more debt a company has on its balance sheet. The lower the ratio, the less leverage that a company has.

A financial leverage ratio of 1.5 indicates that a company is using a fair amount of debt to finance its assets. A low leverage ratio would indicate that the company is financing its assets with only equity capital and no debt.

## Summary

Financial leverage ratio is a measure of how much debt a company uses to finance its assets. It's calculated as the total debt divided by the total net worth of the company.

The higher the leverage ratio, the more debt a company has relative to its equity and net worth. The ideal leverage ratio varies from industry to industry and firm to firm, but it's generally accepted that a leverage ratio over 1x is too much debt for most companies.

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