Financial Leverage Ratio

Financial Times  Sep 29  Comment 
US derivatives regulator pushes looser bank capital requirements amid decline in clearing firms
Mondo Visione  Aug 19  Comment 
The European Banking Authority (EBA) informed today that it will incorporate additional analysis into its calibration reports on Net Stable Funding Requirements and Leverage Ratio. The announcement follows a request by the European Commission (EC)...
Forbes  Jun 22  Comment 
Talks about the need for stricter leverage ratios for the Swiss banks are not new, as the SNB has been demanding a higher leverage ratio since June 2013. But with the Swiss government currently working on draft legislation covering leverage ratios...
Mondo Visione  Jun 16  Comment 
The European Banking Authority (EBA) published today its updated Implementing Technical Standards (ITS) on disclosure and supervisory reporting of leverage ratio for EU institutions. The ITS include changes to templates and instructions to update...
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


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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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