Financial Leverage Index Definition and Explanation

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Quick Definition

Calculates how well a company is utilizing its debt.

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Financial Leverage Index Formula

Explanation of Financial Leverage Index

The Financial Leverage Index measures how well a company is using its debt. The Financial Leverage Index compares two other financial performance ratios: Return on Equity, and a modified version of Return on Total Assets – mainly adding in the affects of Interest Expense and the Tax Rate).

Importance of Financial Leverage Index

If the Financial Leverage Index is greater than 1, the company is using its debt in a positive way. Another way of saying this is its Return on Equity is larger than its Return on Assets. This ratio will be able to tell you that as borrowing increases for a company, whether or not the debt the company shouldered was overall beneficial or detrimental.