Financial Leverage

View Financial Glossary Index

Definition

Amount of a company’s financial debt over its common equity. This can illustrate how much growth was backed by riskier debt. In circumstances such as default or bankruptcy, financial debt has seniority over most (if not all) types of equity in the order of asset liquidation.

Financial leverage helps separate debt between financial debt and non-financial debt. Financial leverage can be used to analyze a company’s capital structure and its reliance on financial debt financing compared to equity financing. A ratio of one indicates a company has been financing with equal amounts of financial debt and common equity, while a ratio less than one means a company has financed itself with more common equity (than financial debt).

All things being equal, a ratio less than one is more favorable. Financial debt can be complex with stringent regulations and affirmative/negative covenants (indentures).

Formula

YCharts calculates this formula by calculating financial debt (See definition below) / Total Common Equity

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