Financial Leverage Ratio Calculator
Financial Leverage Ratio Calculator
This financial leverage ratio calculator allows you to quickly determine how much of a company’s assets are funded through debt rather than equity. Understanding this ratio helps assess the level of financial risk associated with a business.
By calculating financial leverage, you can evaluate a company’s ability to meet its financial obligations. A higher ratio indicates greater debt reliance, which can increase financial risk. While some businesses can manage high financial leverage when generating strong profits, it may become problematic if their financial performance declines.
How to use Financial Leverage Ratio Calculator?
Financial leverage is calculated using the formula:
Financial Leverage = Total Assets/ Total Equity
Now, let’s apply this formula to an example.
Assume Company Beta has the following financial data:
- Current Assets: $800,000
- Non-Current Assets: $4,200,000
- Total Equity: $2,000,000
First, calculate Total Assets:
Total Assets = Current Assets + Non-Current Assets
800,000+4,200,000 = 5,000,000
Now, apply the financial leverage formula:
5,000,000/2,000,000 = 2.5
This means Company Beta has 2.50x in assets for every $1 of equity. A higher financial leverage ratio indicates greater reliance on debt, which can increase financial risk.
For a quick and hassle-free calculation, you can use our Liability Calculator to get instant results!
Interpreting Financial Leverage
A higher financial leverage ratio indicates increased financial risk because the company is relying more on debt financing.
Advantages of High Financial Leverage:
- Potential for higher returns – Debt financing can enhance profitability when investments generate strong returns.
- Business expansion opportunities – Companies can fund growth without diluting ownership.
Disadvantages of High Financial Leverage:
- Increased risk of default – If revenues decline, repaying debt may become challenging.
- Higher borrowing costs – Lenders may charge higher interest rates due to increased risk.
- Lower credit rating – A high leverage ratio can negatively impact a company’s creditworthiness.
It’s important to compare financial leverage within the same industry since businesses operate under different financial structures.
FAQs related to Financial Leverage Ratio Calculator
Some of the mostly asked questions related to financial leverage ratio calculator are as follows:
What is considered a good financial leverage ratio?
There is no universal “good” or “bad” financial leverage ratio. It depends on the industry. For instance, telecommunications companies often operate with high leverage, while insurance companies have strict limitations on debt financing. Comparing a company’s leverage ratio to its industry peers provides a better assessment.
Can financial leverage be negative?
No, financial leverage cannot be negative. Since the formula divides total assets by total equity, the result is always a positive value. If total assets were negative, it would indicate bankruptcy.
What is total equity?
Total equity represents the difference between total assets and total liabilities. It reflects the value that shareholders would receive if all company liabilities were settled.
What is the difference between current and non-current assets?
- Current assets: Short-term resources expected to be used or converted into cash within a year (e.g., cash, inventory, accounts receivable).
- Non-current assets: Long-term investments expected to provide value beyond a year (e.g., real estate, machinery, patents).