Financial Leverage Ratio for Small Business Finance
A financial leverage ratio refers to the proportion of a firm's business operations that exceed its available debt. A company's business operations are defined as the daily activities that create goods or services for profit. This ratio is an important indicator of how much a firm is borrowing to fund its business operations. However, a high leverage ratio is not always a good thing. A company can be too heavily geared, which is a risky situation for investors. The financial leverage ratio measures how much debt a company owes compared to its equity. The ratio is calculated by dividing the company's debt by its equity percentage. For example, if Company A has 25 percent equity, then its financial leverage ratio would be 25%. In contrast, if the company owes 20% of its assets, it would have an 80% debt/equity ratio. This is a high leverage ratio because a company's assets are worth less than the debt, and the higher the financial leverage ratio, the higher the ris...