Financial Leverage

CFA Level I FRA
#1

Financial Leverage = Total Debt/ Shareholders Equity or Avg Total Assets/Avg Total Equity. Which one to use and what’s the difference ?

#2

Financial Leverage is Assets/Equity. The other is Debt to Equity. They’re related, since A/E = 1 + D/E.

The Financial Leverage ratio (called the Equity Multiplier almost everywhere that’s NOT the CFA curriculum) typically shows up in the Dupont Ratios:

ROE = ROA x Leverage Ratio

or

ROE = Net Profit Margin x Total Asset turnover x Leverage Ratio.

#3

Thanks a lot. :slight_smile:

#4

Glad it was helpful.