Financial Leverage Ratio

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Mondo Visione  Aug 11  Comment 
In its role as an advocate for the U.S. listed options industry, OCC constantly focuses on ensuring confidence in the financial markets and the broader economy by promoting stability and market integrity through effective and efficient...
Mondo Visione  Jul 11  Comment 
On July 6, 2016, OCC, along with 30 other exchanges, clearing organizations, and market participants, sent a letter to the Basel Committee on Banking Supervision regarding the Consultative Document on Revisions to the Basel III Leverage Ratio...
Mondo Visione  Jul 7  Comment 
The World Federation of Exchanges (“WFE”), which represents more than 200 market infrastructure providers including exchanges and CCPs, today published its response to the Basel Committee on Banking Standards (“BCBS”) Consultative...
The Economic Times  Jun 14  Comment 
The new kid on the block of lending and financing operations is P2P lending, however, in order to ensure that the sector is well protected, RBI is talking about introducing a form of leverage ratio for it.
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The Economic Times  May 8  Comment 
RBI last month released a consultation paper on P2P lending with a view to bringing the emerging activity under regulations.
Euromoney  Mar 30  Comment 
TriOptima has called on banks to do more to create currency hubs in their trading books, allowing for greater efficiency in managing their balance sheets.
Mondo Visione  Mar 16  Comment 
The European Banking Authority (EBA) will hold a public hearing on its draft report on the calibration of the leverage ratio on Friday 15 April 2016 from 9.00 to 11.30 UK time.    The objective of the hearing is to gather views from all...




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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.

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.
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