How to Calculate Degree of Financial Leverage

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In the world of finance, leverage is synonymous with debt. The more leverage a company has, the more debt it has. Also synonymous with debt and leverage is risk. Many analysts equate higher financial leverage with increased financial risk, as the company has committed a certain portion of future earnings to paying off debt. Analysts like to measure financial leverage with the ratio of debt to assets. When compared against the debt-to-assets ratios of peer companies, this ratio helps analysts gauge the degree of a company's financial leverage.

Obtain the annual report. You can download the report from the company's website or request one by contacting its investor relations department.

Turn to the balance sheet. This has a listing of all the assets and liabilities for the company.

Look up the values for total liabilities and total assets. Assume total liabilities are $10,000 and total assets are $50,000.

Calculate the debt-to-assets ratio. Divide total liabilities by assets and multiply the result to get a percentage. The calculation is $10,000 divided by $50,000, times 100: 20 percent.

Compare this percentage against the debt-to-assets ratios of other companies in the same industry. In general, a high debt-to-assets ratio, in comparison with industry peers, is considered a high degree of leverage and vice versa.


About the Author

James Collins has worked as a freelance writer since 2005. His work appears online, focusing on business and financial topics. He holds a Bachelor of Science in horticulture science from Pennsylvania State University.

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