1. What is Financial Leverage?

Financial leverage measures the degree to which a company uses debt to finance its operations and growth. It shows the proportion of a company's assets that are financed by equity versus debt.

2. How Does the Calculator Work?

The calculator uses the Financial Leverage formula:

Where:

• \( Total\ Assets \) — The sum of all assets owned by the company (currency)
• \( Equity \) — The residual interest in the assets of the entity after deducting liabilities (currency)

Explanation: A higher financial leverage ratio indicates more debt financing relative to equity financing.

3. Importance of Financial Leverage

Details: Financial leverage is important for assessing a company's financial risk. While leverage can magnify returns, it also increases the potential for financial distress.

4. Using the Calculator

Tips: Enter total assets and equity in the same currency units. Both values must be positive numbers.

5. Frequently Asked Questions (FAQ)

Q1: What is a good financial leverage ratio?
A: This varies by industry, but generally a ratio between 1.5 and 3 is considered moderate. Higher ratios indicate more risk.

Q2: How does financial leverage differ from debt-to-equity ratio?
A: While related, financial leverage uses total assets in the numerator, while debt-to-equity uses total liabilities.

Q3: Why would a company want higher financial leverage?
A: Companies may use leverage to finance growth when they believe the return on assets will exceed the cost of debt.

Q4: What are the risks of high financial leverage?
A: High leverage increases financial risk as the company must meet debt obligations regardless of business performance.

Q5: How should financial leverage be interpreted?
A: It should be compared to industry benchmarks and considered alongside other financial metrics.