Financial Leverage Ratio

RECENT NEWS
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...
Mondo Visione  Apr 8  Comment 
The Federal Reserve Board, the Federal Deposit Insurance Corporation (FDIC), and the Office of the Comptroller of the Currency (OCC) on Tuesday adopted a final rule to strengthen the leverage ratio standards for the largest, most interconnected...
Financial Times  Apr 7  Comment 
Changes mean more capital will need to be held against total assets and follows concerns banks had room to game the existing system
Euromoney  Apr 3  Comment 
While banks now expect US regulators to follow Basel’s lead in relaxing the denominator of total assets, the Fed still worries about dealer dependence on short-term funding from SFTs and might demand a capital surcharge.
New York Times  Mar 20  Comment 
The New York Fed president's concerns are said to have delayed a banking rule. | Questions about why seven Dewey & LeBoeuf employees who have pleaded guilty have not been identified. | The Federal Reserve is continuing to taper its bond-buying...
Euromoney  Jan 30  Comment 
Basel revisions dilute a key safeguard; bankers are celebrating.
Euromoney  Jan 15  Comment 
The recent loosening of rules regarding leverage ratios and collateral by the Basel Committee on Banking Supervision might boost banks’ available trading resources, but FX is not out of the regulatory woods.




RELATED WIKI ARTICLES

Related Articles

 
TOP CONTRIBUTORS

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.

Example

  • 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.
Wikinvest © 2006, 2007, 2008, 2009, 2010, 2011, 2012. Use of this site is subject to express Terms of Service, Privacy Policy, and Disclaimer. By continuing past this page, you agree to abide by these terms. Any information provided by Wikinvest, including but not limited to company data, competitors, business analysis, market share, sales revenues and other operating metrics, earnings call analysis, conference call transcripts, industry information, or price targets should not be construed as research, trading tips or recommendations, or investment advice and is provided with no warrants as to its accuracy. Stock market data, including US and International equity symbols, stock quotes, share prices, earnings ratios, and other fundamental data is provided by data partners. Stock market quotes delayed at least 15 minutes for NASDAQ, 20 mins for NYSE and AMEX. Market data by Xignite. See data providers for more details. Company names, products, services and branding cited herein may be trademarks or registered trademarks of their respective owners. The use of trademarks or service marks of another is not a representation that the other is affiliated with, sponsors, is sponsored by, endorses, or is endorsed by Wikinvest.
Powered by MediaWiki