The Financial Leverage Calculator is a trusted tool for anyone working with company finances, including managers, investors, and credit analysts. It shows how much a business relies on borrowed funds compared to equity, helping measure risk and growth potential. High leverage can mean faster expansion but also higher risk. This calculator belongs to the Corporate Finance & Risk Analysis Tools category.
Formula of Financial Leverage Calculator
1. Financial Leverage Ratio (Equity Multiplier)
Formula:
Financial Leverage = Total Assets / Total Equity
Where:
- Total Assets = All resources owned by the company (in dollars).
- Total Equity = Value owned by shareholders (in dollars).
Meaning:
Shows how many dollars of assets are funded by each dollar of equity.
2. Financial Leverage based on Debt and Equity
Formula:
Financial Leverage = Total Debt / Total Equity
Where:
- Total Debt = Short-term + Long-term debt.
- Total Equity = Shareholders’ equity.
Meaning:
Reveals the proportion of debt used to finance the company’s equity.
3. Degree of Financial Leverage (DFL)
Formula:
DFL = EBIT / (EBIT − Interest Expense)
Where:
- EBIT = Earnings Before Interest and Taxes.
- Interest Expense = Total interest payable.
Meaning:
Shows how a change in operating income affects net income due to interest costs.
Reference Table
| Ratio | Common Benchmark | What It Shows |
|---|---|---|
| Equity Multiplier | 2–3 | Moderate leverage |
| Debt to Equity | 1 or lower | Healthy debt use |
| DFL | 1.2–2.0 | Reasonable profit sensitivity |
Example of Financial Leverage Calculator
Scenario:
A company has:
- Total Assets = $1,000,000
- Total Equity = $400,000
- Total Debt = $600,000
- EBIT = $120,000
- Interest Expense = $20,000
Calculations:
- Equity Multiplier: 1,000,000 / 400,000 = 2.5
- Debt to Equity: 600,000 / 400,000 = 1.5
- DFL: 120,000 / (120,000 − 20,000) = 120,000 / 100,000 = 1.2
Interpretation:
This company has moderate leverage and its profits aren’t too sensitive to debt costs.
Most Common FAQs
It helps companies grow faster but adds risk. Monitoring it ensures debt doesn’t get out of control.
It varies by industry. Many firms aim for an equity multiplier under 3 and a debt-to-equity ratio close to or below 1.
At least every quarter or whenever taking on new loans or equity.