3- Financial Leverage is the third and final component of Return on Equity. Financial Leverage is a measure of how much we use equity and debt to finance our assets. As debt increases, we financial leverage increases. Generally, management tends to prefer equity financing over debt since it carries less risk. The Financial Leverage Ratio is calculated by dividing Assets by Shareholder Equity. EXAMPLE — Average assets are $ 500,000 and average shareholder equity is $ 320,000. Financial Leverage Ratio is $ 500,000 / $ 320,000 or 1.56. For each $ 1.56 in assets, we are using $ 1.00 in equity financing.
Posted on: Sat, 22 Jun 2013 13:03:36 +0000
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