Calculate your company’s financial leverage ratio with this calculator.
Updated: March 20, 2025
At the top of this page is a financial leverage ratio calculator any business owner can use. Why give it a try? It helps business owners quickly understand the proportion of their assets financed by debt versus owner’s equity. To help you to understand why it’s a metric worth tracking — and what goes into calculating it — we spoke with Tom Brock, a licensed CPA and CFA Charterholder with over a decade of experience helping small businesses.
The financial leverage ratio is a metric that indicates the proportion of a company’s assets financed by owners’ equity, as opposed to debt. The larger the ratio, the riskier the capital structure. Generally, a relatively low financial leverage ratio is preferred by creditors and credit rating agencies, because it indicates the company is taking on less debt to buy assets.
— Tom Brock, Certified Public Accounting (CPA) and Chartered Financial Analyst (CFA)
The financial leverage ratio, which is also referred to as the equity multiplier, is a metric that indicates the extent to which a company’s assets are financed by owners’ equity, as opposed to debt obligations. It is a long-term solvency ratio designed to give financial statement readers a sense of the company’s capital structure and level of financial risk. The larger the ratio, the greater the risk.
The financial leverage ratio is computed by dividing a company’s total assets by its total equity. For example, a company with $2 million of assets and $1 million of equity has a financial leverage ratio of 2.0 ($2,000,000 / $1,000,000 = 2.0).
The financial leverage ratio, also known as the equity multiplier, is calculated using the following formula:
Let’s break down what each of these mean.
This represents everything a company owns that has monetary value, including current assets and noncurrent assets. Examples of each are as follows:
Total assets is a prominently disclosed line item on a company’s balance sheet.
Total equity, which is also referred to as owners’ equity, shareholders’ equity and net worth, represents the residual interest in a company’s total assets after deducting total liabilities. It includes the following items:
Like total assets, total equity is a prominently disclosed line item on a company’s balance sheet.
Once more we spoke with Tom Brock for his insights on what businesses can gleam from keeping up the numbers.
In a nutshell, the financial leverage ratio indicates how much of a company’s assets are financed via equity, rather than debt. The lowest possible ratio measure is 1.0, which indicates a company is 100% equity financed and has no debt. Increasingly higher ratios indicate higher proportions of debt utilization. For creditors and credit rating agencies, this means elevated levels of cash flow volatility and financial risk.”
— Tom Brock, Certified Public Accounting (CPA) and Chartered Financial Analyst (CFA)
While a lower financial leverage ratio is considered less risky than a higher ratio, the optimal ratio varies by industry, geographic location and company size.
There is no specific financial leverage ratio that is considered “bad.” Some types of companies are much more heavily leveraged than others. The optimal financial leverage ratio is one that is sustainable and facilitates the highest possible risk-adjusted return for the company’s owners.
The safest financial leverage ratio is 1.0. This measure is reflective of a company that has financed its base of assets entirely with equity. Generally, the absence of debt translates to greater resiliency during economic downturns.
There is no ratio measure that is unequivocally considered “too high.” The utilization of leverage can vary widely, depending on industry, geographic location and company size. That said, a leverage ratio of 5.0 or more is generally considered to be very risky, regardless of the underlying circumstances. At this level, a company’s capital structure reflects a debt and equity split of 80% and 20%, respectively.
The optimal financial leverage ratio can vary widely from one company to the next. Leverage increases financial risk, but assuming risk is necessary and sensible for certain companies, especially those with capital intensive business models. For any given company, the ideal financial leverage ratio is that which is sustainable and facilitates the highest possible risk-adjusted return for equity investors.
Improving the financial leverage ratio means different things, depending on the circumstances. For example, a company that is too highly leveraged needs to drive its ratio lower in order to bolster its solvency. Conversely, a well-run company that has no debt may benefit by assuming some debt in order to generate a higher return on investment for its owners. A company can decrease its financial leverage ratio by increasing its profitability, thereby increasing both total assets and total equity (via retained earnings). A company can increase its financial leverage ratio by borrowing money and using the funds to invest in growth-oriented assets.
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