AnswersDriveThe 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.
Also, what does the leverage ratio tell you?
What is a 'Leverage Ratio' A leverage ratio is any one of several financial measurements that look at how much capital comes in the form of debt (loans), or assesses the ability of a company to meet its financial obligations.
How does leverage increase risk?
At an ideal level of financial leverage, a company's return on equity increases because the use of leverage increases stock volatility, increasing its level of risk which in turn increases returns. However, if a company is financially over-leveraged a decrease in return on equity could occur.
Is it better to have a high or low operating leverage?
A company with a greater ratio of fixed to variable costs is said to be using more operating leverage. If a company's variable costs are higher than its fixed costs, the company is said to be using less operating leverage. A high operating leverage means that a firm is making few sales but with high margins.