Financial Leverage Ratio

The Hindu Business Line  Jan 8  Comment 
The Reserve Bank of India on Thursday said its revised guidelines on the leverage ratio framework for banks will come into effect from April 1, 2015.The leverage ratio under the Bas...
Euromoney  Dec 23  Comment 
US officials are waging a war to promote the leverage ratio as a binding constraint on banks’ capital frameworks, further imperilling strategic planning for cross-border lenders.
Mondo Visione  Nov 20  Comment 
In a speech to the Oliver Wyman Institute’s annual conference on Thursday, Martin Taylor, an external member of the Financial Policy Committee, addresses two subjects: the role of the leverage ratio in the UK’s capital framework for banks, and...
The Economist  Nov 6  Comment 
UK Only Article:  UK article only Issue:  Welcome back to Washington Fly Title:  The leverage...
Financial Times  Oct 31  Comment 
BoE’s new level of 4.05% lower than feared
Financial Times  Oct 20  Comment 
Decision to fast-track process suggests finished rule could be unveiled as soon as 2015 or 2016
Mondo Visione  Sep 3  Comment 
The Federal Reserve Board, the Federal Deposit Insurance Corporation, and the Office of the Comptroller of the Currency on Wednesday adopted a final rule modifying the definition of the denominator of the supplementary leverage ratio in a manner...
Mondo Visione  Jul 11  Comment 
The Financial Policy Committee is today launching a consultation on the design of a leverage ratio framework for the UK. This forms part of the FPC's review of the role of the leverage ratio within the capital framework for banks, as requested by...
Mondo Visione  Jun 5  Comment 
The European Banking Authority (EBA) published today its final draft Implementing Technical Standards (ITS) on disclosure for the leverage ratio. These standards will be part of the EU Single Rulebook in the banking sector and aim at harmonising...
New York Times  Apr 9  Comment 
The Basel Committee is considering rules that will affect banks’ business strategies significantly and continue to influence how they strengthen their auditing and compliance teams for years to come, writes Mayra Rodríguez Valladares in Another...


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The Financial Leverage ratio equals total assets divided by total equity

The financial leverage ratio is a measure of how much assets a company holds relative to its equity. A high financial leverage ratio means that the company is using debt and other liabilities to finance its assets -- and, every thing else being equal, is more riskier than a company with lower leverage.

In essence, the financial leverage ratio is a variation of the debt to equity ratio and would move in tandem with debt to equity. If a company can employ its assets at a higher return than its cost of debt, it would improve its returns on equity capital. If not the company's debt outweighs the return from its assets, then the debt cost may outweigh the return on assets. Over the long-term, this would lead to bankruptcy. Investors should take this into consideration when investing in a company with a high financial leverage ratio, especially in times of rising interest rates.

The level of leverage depends on a lot of factors such as availability of collateral, strength of operating cash flow and tax treatments. Thus, investors should be careful about comparing financial leverage between companies from different industries. For example companies in the banking industry naturally operates with a high leverage as their assets are easily collateralized.


  • Company XYZ has $4 billion in assets and $1 billion in equity. This would mean that it is financing its assets with $ 3 billion liabilities. And the the company's financial leverage ratio would be 4.
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