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Financial Leverage Ratio Formula:
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The Financial Leverage Ratio (FLR) measures the proportion of a company's debt financing relative to its equity financing. It indicates how much debt a company is using to finance its assets compared to the amount of equity.
The calculator uses the Financial Leverage Ratio formula:
Where:
Explanation: The ratio shows the degree to which a company is utilizing borrowed money. A higher ratio indicates more debt financing, while a lower ratio suggests more equity financing.
Details: This ratio is crucial for assessing a company's financial risk, capital structure efficiency, and ability to meet debt obligations. It helps investors and creditors evaluate the company's leverage position and financial stability.
Tips: Enter total debt and total equity in the same currency units. Both values must be positive, with total equity greater than zero for valid calculation.
Q1: What is a good Financial Leverage Ratio?
A: Generally, a ratio below 2.0 is considered acceptable, but this varies by industry. Lower ratios indicate less financial risk, while higher ratios suggest greater reliance on debt.
Q2: How does FLR differ from Debt-to-Equity Ratio?
A: FLR and Debt-to-Equity Ratio are essentially the same calculation, both measuring the relationship between debt and equity financing.
Q3: What are the risks of high financial leverage?
A: High leverage increases financial risk, interest expenses, and vulnerability to economic downturns, but can also amplify returns when business is good.
Q4: Should FLR be compared across industries?
A: No, optimal leverage ratios vary significantly by industry due to different capital requirements and business models.
Q5: How often should FLR be calculated?
A: FLR should be monitored quarterly or annually as part of regular financial analysis to track changes in capital structure over time.