How to Calculate Degree of Financial Leverage

by James Collins ; Updated July 27, 2017
The debt-to-assets ratio is used to measure the degree of financial leverage for a company.

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.

Step 1

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

Step 2

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

Step 3

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

Step 4

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.

Step 5

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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