Financial Leverage = Total Debt/ Shareholders Equity or Avg Total Assets/Avg Total Equity. Which one to use and what’s the difference ?
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
ROE = Net Profit Margin x Total Asset turnover x Leverage Ratio.
Thanks a lot.
Glad it was helpful.